Cradle Print Ltd is a company listed on Singapore Exchange. Currently, its target debt-equity ratio is 1. It is considering building a new $600,000 plant in Kallang Industrial Park. This new plant is expected to generate after-tax cash flows of $73,150 per year perpetually. The tax rate is 17%. It plans to finance the said acquisition as follows: (1) A $300,000 new issue of common stock. The issuance costs of the new common stock would be about 10% of the amount raised. The required return of the company?s new equity is 20%. (2) A $300,000 issue of 20-year bonds. The issuance costs of the new debt would be 2% of the proceeds. The Company can raise new debt at 10%. (a) Compute the Weighted Average Cost of Capital of Cradle Print Ltd. (5 marks) (b) Calculate the Net Present Value (NPV) of the new printing plant based on WACC: (i) without flotation costs; and (ii) with flotation costs. Will Cradle Print Ltd accept the new printing plant project in either case? (15 marks)
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