You are the CFO of Newbury Printing and Publishing (NPP). You are currently reviewing the firm’s capital structure, as well as considering a new project. Selected financial information for NPP appears...

You are the CFO of Newbury Printing and Publishing (NPP). You are currently reviewing the firm’s capital structure, as well as considering a new project. Selected financial information for NPP appears below.The interest rate on the firm’s debt is 6% and the tax rate is 40%. Also, the Tbill rate is 4.5% and the market risk premium is 5%. (a) Using the information above, estimate the firm’s WACC. Show your work. (b) Given the information above, do you think the mix of debt and equity is optimal? Be precise: How much leverage should the firm have? Why? What other information would be useful?
NPP is considering a leverage recapitalization. Suppose the firm decides to sell $100 million in new debt and use the proceeds to repurchase stock. (c) If this transaction had been completed at the beginning of 2000, how would it have affected the firm’s interest expense, taxes, and net income for the year? (d) How would this transaction affect the firm’s value and WACC? (e) NPP has the opportunity to invest $50 million in a new project. If it decides to go ahead with the project, NPP will finance the project entirely with debt. The project has the same risks as the firm’s current business, and you forecast that the project will generate after-tax cashflows of $8 million in perpetuity. What is the NPV of the project?