RD Mining Inc Investment Company

Please use excel to show all the detailed calculations. Need to have all details and explanations for below both questions.
Question 1 (22 marks)
Copper Strike Mining Company (CSMC) needs to raise $55,000,000 for the development of a new mining site and will do so by issuing either new bonds or new preferred shares. If CSMC issues preferred shares or bonds to finance this project, it is estimated that the beta will increase to 1.8. The following outlines the information on these two options:

1. Bonds: Bonds with a face value of $55,000,000. The bonds will pay interest at 8%, which is payable quarterly, and mature in 15 years. Current yield to maturity (YTM) on similar bonds is 8%, compounded quarterly.
2. Preferred shares: 440,000 non-voting preferred shares at $125 per share. The preferred shares will be non-cumulative with an annual dividend of $9.00 per share.

The company has the following issued capital:

1. Bonds issued to RD Mining Inc., a private investor. The bonds have a face value of $59,800,000 and a coupon rate of 7%, payable semi-annually. The bonds mature in 10 years. Similar bonds which are actively traded have a current YTM of 7.5%.
2. There are 200,000 non-voting preferred shares outstanding that pay an annual dividend of $2.40 per share. The dividends are cumulative. Currently, preferred shares with similar risk require a return of 9%. The company tries to pay the dividends on these shares every year and has done so for the last four years.
3. There are 1,000,000 common shares outstanding. Recently, the company had a valuation completed which calculated the current market value to be $75 per common share.
4. Management had recent discussions with an investment banker and determined that flotation costs (including legal fees) for private financing will be 6% before tax on new issues of common and preferred shares, and 3% after tax on new issues of debt.
5. CSMC’s corporate income-tax rate is 25%.
6. Based on market data, you have determined that the current risk-free rate is 4% and the expected market price of risk is expected to be 7%. You have estimated that the company’s beta is 1.7.
   CSMC has done no analysis of its optimal capital structure and understands that either of the two options would change its capital structure. The company is interested in knowing how the two options compare to the option of using the company’s retained earnings.
   Required:
   a) Calculate the company’s current weighted average cost of capital (WACC) and the WACC under both options. (17 marks) – step by step detail calculation is required
   b) Describe the advantages and disadvantages associated with each of these proposals, including the implications on cash flows and net earnings of either option, and make a recommendation as to which proposal should be accepted. (Note: Calculations of cash flows and net earnings are not required.) (5 marks)

Question 2 (14 marks)
MapleWood Ltd., a pulp and paper company, has recently appointed a new CEO, Sarah Robbins. As her first initiative, Sarah proposed a major capital expenditure program for MapleWood to the board of directors: that MapleWood replace its production equipment with new and much more efficient equipment.
While the cost of the new equipment at $1.5 billion is significant, she argues that the new equipment will not only be more energy efficient using 25% less power; it will also use the raw materials more efficiently with almost 40% less waste. She also suggests that by becoming more environmentally friendly in its production processes, MapleWood will attract new customers who are interested in improved sustainability practices and, as a result, sales are likely to grow by 5% from their current level of $7.2 billion to 7.56 billion.
The increased efficiency of the new production equipment means that the cost of goods sold (COGS) is expected to fall from its current level of 60% of sales to 57.5% of sales. These savings are a direct result of the reduction in energy consumption and in the amount of waste being generated by the production process. These changes result in a need to increase net working capital by $25,000,000. The company’s current tax rate is 28%.
The total cost of the new equipment will be $1.5 billion, of which $1.475 billion is the capital outlay and $25 million is the cost of installation. The new equipment has an estimated useful life of 15 years, at the end of which its estimated salvage value is $50 million. At the end of the five-year planning horizon the equipment is expected to be worth $700 million.
If replaced, the existing equipment can be sold for $275 million today. This equipment has a remaining life of approximately five years, at the end of which it is expected to have zero salvage value.
The equipment is in an asset class with a CCA rate of 10% and qualifies for the Accelerated Investment Incentive for 1.5 times the CCA in the year of acquisition. On disposal, there will be a positive balance remaining in the CCA class.
Because MapleWood is changing its strategy toward more sustainable production, for the time frame of the project, this will be a riskier project than the firm on average and the appropriate discount rate for this project is 8.5%.
Required
a) Calculate the payback period for the project (4 marks) – use excel show step by step detail calculation is required
b) Calculate the net present value. (10 marks) – use excel show step by step detail calculation is required