Assignment: You are interested in proposing a new venture to the management of your company. Pertinent financial information is given below.
Balance Sheet Data
|
Cash
|
3,000,000
|
Accounts Payable and Accruals
|
14,000,000
|
|
Accounts Receivable
|
24,000,000
|
Notes Payable
|
41,000,000
|
|
Inventories
|
45,000,000
|
Long-Term Debt
|
50,000,000
|
|
|
|
Preferred Stock
|
20,000,000
|
|
Net Fixed Assets
|
128,000,000
|
Common Equity
|
75,000,000
|
|
Total Assets
|
200,000,000
|
Total Liabilities &
Owners' Equity
|
200,000,000
|
Last year's sales were $210,000,000.
The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 9 percent semi-annual coupon, and are currently selling for $870.73.
You also have 100,000 shares of perpetual preferred stock outstanding, which pays a dividend of $7.80 per share. The current market price is $94.00.
The company has 10 million shares of common stock outstanding with a current price of $15.00 per share. The stock exhibits a constant growth rate of 8 percent. The last dividend (D0) was $.90.
Your firm does not use notes payable for long-term financing.
The firm's target capital structure is 25% debt, 5% preferred stock, and 70% common equity. The firm does not plan to issue new common stock.
Your firm's federal + state marginal tax rate is 38%.
The firm has the following investment opportunities currently available in addition to the venture that you are proposing:
|
Project
|
Cost
|
IRR
|
|
A
|
17,000,000
|
21%
|
|
B
|
21,000,000
|
19%
|
|
C
|
16,000,000
|
15%
|
|
D
|
28,000,000
|
11%
|
|
E
|
25,000,000
|
8%
|
All projects, including Project I, are assumed to be of average risk. Your venture would consist of a new product introduction (You should label your venture as Project I, for "introduction"). You estimate that your product will have a six-year life span, and the equipment used to manufacture the project falls into the MACRS 5-year class. The resulting MACRS depreciation percentages for years 1 through 6, respectively, are 20%, 32%, 19%, 12%, 11%, and 6%. Your venture would require a capital investment of $17,000,000 in equipment, plus $1,000,000 in installation costs. The venture would also result in an increase in accounts receivable and inventories of $3,000,000. At the end of the six-year life span of the venture, you estimate that the equipment could be sold at a $5,000,000 salvage value. Your venture would incur fixed costs of $1,000,000 per year, while the variable costs of the venture would equal 30 percent of revenues. You are projecting that revenues generated by the project would equal $6,000,000 in year 1, $14,000,000 in year 2, $15,000,000 in year 3, $16,000,000 in year 4, $11,000,000 in year 5, and $8,000,000 in year 6.