Brook Enterprises has 12,000 bonds outstanding that have a 6% coupon rate and a $1,000 par value. The bonds are selling at a quoted price of 98, pay interest semi-annually, and mature in 28 years. There are 400,000 shares of 6 percent $100 par value preferred stock outstanding with a current market price of $83 a share. In addition, there are 1.40 million shares of common stock outstanding with a market price of $54 a share and a beta of 1.2. These shares were originally sold for $30 each. The common shareholders received a dividend of $1.80 per share last year. Based on the last 5 years growth, the company estimates a growth rate in dividends of 4% forever. The firm's marginal tax rate is 34%.
Brook Enterprises is considering a major expansion that would cost $25 million. The project would provide cash flows before tax of $3 million per year for 20 years beginning at the end of year one. At the end of 20 years the machine can be salvaged for $2 million. The machine belongs to asset class with a CCA rate of 25%. Assume the class will stay open at the end of the project.
Flotation cost to issue new preferred share is 5%, new debt is 3%, and new common share is 7%.
Would this expansion create value for Brook Enterprises? Perform a NPV (net present value) analysis.