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| Teaching Since: | May 2017 |
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| Questions Answered: | 66690 |
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MCS,PHD
Argosy University/ Phoniex University/
Nov-2005 - Oct-2011
Professor
Phoniex University
Oct-2001 - Nov-2016
COST OF CAPITAL, NET PRESENT VALUE
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Leakam Company’s product engineering department has developed a new product that has a three-year life cycle. Production of the product requires development of a new process that requires a current $100,000 capital outlay. The $100,000 will be raised by issuing $60,000 of bonds and by selling new stock for $40,000. The $60,000 in bonds will have net (after-tax) interest payments of $3,000 at the end of each of the three years, with the principal being repaid at the end of year 3. The stock issue carries with it an expectation of a 17.5 percent return, expressed in the form of dividends at the end of each year ($7,000 in dividends is expected for each of the next three years). The sources of capital for this investment represent the same proportion and costs that the company typically has. Finally, the project will produce after-tax cash inflows of $50,000 per year for the next three years.
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