Reference no: EM132621872

Question - KLD Co. is analyzing a proposed project. The company expects to sell 12,000 units, plus or minus 4 percent. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6 percent range. The depreciation expense is $30,000 per year, over the 5-year life of the project, using the straight line. The tax rate is 35 percent. The sale price is estimated at $14 a unit, plus or minus 5 percent. What is the NPV under the base case scenario if the required rate of return is 12%? (4 marks) (b) KLD Co. has a debt-equity ratio of 1. Its weighted average cost of capital is 11%, and its cost of debt is 9%. The corporate tax is 35%.

Required -

(i) What is KLD's cost of equity?

(ii) What is KLD's unlevered cost of equity?

KLD is increasing the proportion of debt in the firm (at the same cost) so that the new debt-equity ratio is 1.5.

(iii) What is the new cost of equity?

(iv) What is the weighted average cost of capital?

(v) Explain why the cost of equity changes when the debt-equity ratio changes.