SFE Inc. has 1 million shares of common stock outstanding at a book value of $40 per share. The stock trades for $50 per share.

SFE Inc. has 1 million shares of common stock outstanding at a book value of $40 per share. The stock trades for $50 per share. It also has $10 million in face value of debt (corporate bonds of 5 years with coupon rate 10.5%) that trades at 110% of face value. The company’s equity beta is 1.2. The risk-free rate is 4% and the market return is 10%. The tax rate is 35%.

a) What is the total market value of equity? 

b) What is the total market value of debt? 

c) What is its ratio of debt to total firm value in the market-value driven capital structure? 

d) What is the before-tax cost of debt? 

e) What is the after-tax cost of debt? 

f) What’s the cost of equity? 

g) What’s the after-tax WACC? 

h) The company is considering a project which requires purchasing a machine for $200,000 today (year 0). The machine will be depreciated straight-line over the next 5 years to a salvage value of zero. The revenue from this project is $350,000 each year, for years 1 to 5. The cost of good sold is $250,000 every year. Fixed operating cost is $30,000 each year, for the next five years. What is the NPV of the project?