Kimberly-Clark has an opportunity to invest $500,000 today in a new project that will generate positive free cash flows for five years. The free cash flows will be $100,000 per year for the first three years, then $250,000 per year for the final two years. K-C maintains 40% debt, 50% common equity, and 10% preferred stock, with total assets valued at $100 million. The company also has a marginal tax rate of 21%.

Kimberly-Clark has an opportunity to invest $500,000 today in a new
project that will generate positive free cash flows for five years. The free cash flows will be $100,000 per year for the first three years, then $250,000 per year for the final two years. K-C maintains 40% debt, 50% common equity, and 10% preferred stock, with total assets valued at $100 million. The company also has a marginal tax rate of 21%.
a.      Currently K-C bonds sell for $1,050. They have five years to maturity and a 10% coupon rate, and $1,000 par value. The bond makes semi-annual coupon payments.  What is the before-tax cost of debt for K-C?
b.     Currently, the 5-year U.S. T-bond has a 2.5% yield, and the required return on the market is 10%. Given a beta for K-C stock of 1.1, what cost of equity is implied by the CAPM?
c.      The preferred stock of K-C sells for $50. The next dividend is expected to be $4.50. What is the cost of preferred stock?
d.     What is the WACC for K-C? What would be the financial impact to K-C if it can lower its cost of capital by 2%?
e.      Should K-C accept this project? Why? Justify your answer.

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The post Kimberly-Clark has an opportunity to invest $500,000 today in a new project that will generate positive free cash flows for five years. The free cash flows will be $100,000 per year for the first three years, then $250,000 per year for the final two years. K-C maintains 40% debt, 50% common equity, and 10% preferred stock, with total assets valued at $100 million. The company also has a marginal tax rate of 21%. appeared first on Superb Professors.