Mustard Patch Doll Company needs to purchase new plastic molding machines to meet the
demand for its product. The cost of the equipment is $100,000. It is estimated that the ﬁrm will
increase operating cash ﬂow (OCF) by $22,000 annually for the next seven years. The ﬁrm is
ﬁnanced with 40% debt and 60% equity, both based on market values. The ﬁrm's cost of equity is
16% and its pre-tax cost of debt is 8%. The ﬂotation costs of debt and equity are 2% and 8%,
respectively. Assume the ﬁrm's tax rate is 34%.
(A) What is the ﬁrm's WACC?
(B) Ignoring ﬂotation costs, what is the NPV of the proposed project?
(C) What is the weighted average ﬂotation cost, fA, for the ﬁrm?
(D) What is the dollar ﬂotation cost of the proposed ﬁnancing?
(E) After considering ﬂotation costs, what is the NPV of the proposed project?

Question

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The Answer of Mustard Patch Doll Company needs to purchase new plastic molding machines to meet the
demand for its product. The cost of the equipment is $100,000. It is estimated that the ﬁrm will
increase operating cash ﬂow (OCF) by $22,000 annually for the next seven years. The ﬁrm is
ﬁnanced with 40% debt and 60% equity, both based on market values. The ﬁrm's cost of equity is
16% and its pre-tax cost of debt is 8%. The ﬂotation costs of debt and equity are 2% and 8%,
respectively. Assume the ﬁrm's tax rate is 34%.
(A) What is the ﬁrm's WACC?
(B) Ignoring ﬂotation costs, what is the NPV of the proposed project?
(C) What is the weighted average ﬂotation cost, fA, for the ﬁrm?
(D) What is the dollar ﬂotation cost of the proposed ﬁnancing?
(E) After considering ﬂotation costs, what is the NPV of the proposed project?

Mustard Patch Doll Company Needs to Purchase New Plastic Molding