Raymond Mining Corporation has 8.5 million shares of common stock outstanding and 135,000
semi-annual bonds outstanding with face value $1000 and coupon rate of 7.5%. The common
stock currently sells for $34 per share and has a beta of 1.25, and the bonds have 15 years to
maturity and sell for 114 percent of the face value ($114 per $100 of face value). The market risk
premium is 7.5 percent, T-bills are yielding 4 percent (thus risk free rate is 4%), and the Raymond
Mining tax rate is 35%. Raymond Mining is considering an investment which will cost $2,590,000.
The investment produces no cash flows for the first year. In the second year, the cash inflow is
$580,000. This inflow will increase to $1,500,000 and then $2,000,000 for the following years before
ceasing permanently. What is the project’s NPV? What is the Internal Rate of Return? What is the
Discounted Payback Period? What is the Profitability Index?
