Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

Ask Basic Finance Expert

Assignment:

You are interested in proposing a new venture to the management of your company. Relevant financial information is given below.

BALANCE SHEET

Cash 2,000,000 Accounts Payable and Accruals 18,000,000

Accounts Receivable 28,000,000 Notes Payable 40,000,000

Inventories 42,000,000 Long-Term Debt 60,000,000

Preferred Stock 10,000,000

Net Fixed Assets 133,000,000 Common Equity 77,000,000

Total Assets 205,000,000 Total Claims 205,000,000

• Last year’s sales were $225,000,000.

• The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are presently selling for $874.78.

• You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The present market price is $90.00. Any new issues of preferred stock will incur a $3.00 per share flotation cost.

• The company has 10 million shares of common stock outstanding with a at present price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock can be sold with flotation costs, including market pressure, of 15 percent.

• The risk-free rate is presently 6 percent, and rate of return on the stock market as a whole is 14 percent. Your stock’s beta is 1.22.

• Stockholders need a risk premium of 5 percent above return on the firms bonds.

• The firm expects to have extra retained earnings of $10 million in the coming year, and expects depreciation expenses of $35 million.

• Your firm does not use notes payable for long-term financing.

• The firm considers its present market value capital structure to be optimal, and wishes to maintain that structure. (Hint: Examine the market value of the firm’s capital structure, rather than its book value.)

• The firm is at present using its assets at capacity.

• The firm’s management requires a 2 percent adjustment to the cost of capital for risky projects.

• Your firm’s federal + state marginal tax rate is 40%.

• Your firm’s dividend payout ratio is 50 percent, and net profit margin was 8.89 percent.

• The firm has following investment opportunities presently available in addition to the venture that you are proposing:

Project   Cost             IRR
A         10,000,000    20%
B         20,000,000    18%
C         15,000,000    14%
D         30,000,000    12%
E         25,000,000     10%

Your venture will consist of a new product introduction (You must label your venture as Project I, for “introduction”). You estimate that your product would have a six-year life span, and the equipment used to manufacture the project falls into the MACRS 5-year class. Your venture will need a capital investment of $15,000,000 in equipment, plus $2,000,000 in installation costs. The venture will also result in an increase in accounts receivable and inventories of $4,000,000. At the end of the six-year life span of the venture, you estimate that the equipment can be sold at a $4,000,000 salvage value.

Your venture, that management considers fairly risky, will increase fixed costs by a constant $1,000,000 per year, while variable costs of the venture will equal 30 percent of revenues. You are projecting that revenues generated by project will equal $5,000,000 in year 1, $10,000,000 in year 2, $14,000,000 in year 3, $16,000,000 in year 4, $12,000,000 in year 5, and $8,000,000 in year 6.
The following list of steps provides a structure which you must use in analyzing your new venture.

Note: Carry all final calculations to two decimal places.

1. Determine the costs of the individual capital components:

a. long-term debt

b. preferred stock

c. retained earnings (avg. of CAPM, DCF, & bond yield + risk premium approaches)

d. new common stock

2. find out the value of the long-term elements of the capital structure, and find out the target percentages for the optimal capital structure. Carry weights to 4 decimal places.

3. find out the retained earnings break point.

4. Draw the MCCF schedule, including depreciation-generated funds in the schedule.

5. find out the Year 9 investment for Project I.

6. find out the annual operating cash flows for years 1-6 of the project.

7. find out the extra non-operating cash flow at the end of year 6.

8. Draw a timeline which summarizes all of the cash flows for your venture

9. find out the IRR and payback period for Project I

10. Draw IOS schedule including Project I along with Projects A-F

11. Determine your firm’s cost of capital

12. Indicate which projects must be accepted based on your MCC and IOS schedules and why?

13. find out the NPV for Project I at the risk-adjusted cost of capital for the project. Should management adopt this project based on your analysis? Describe.  Would your answer be different if the project were determined to be of average risk?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M92012
  • Price:- $60

Priced at Now at $60, Verified Solution

  • AsyU replied

    Dear tutor please provide me help regarding this question: John is shopping for used car. He has found one car which price is $4500. The dealer has told John that is he can come up with down payment of $500 the dealer will finance of the price at 12% per annual rate over 2 years (24 months). Assuming that John accepts the dealer's offer, what will his monthly (end-of-month) payment amount be?

Have any Question? 


Related Questions in Basic Finance

Beta electronics is considering the purchase of testing

Beta Electronics is considering the purchase of testing equipment that will cost $633,000 to replace old equipment. Assume the new equipment will generate before-tax savings of $281,000 over the four years. The new equip ...

Instructions bulluse microsoft word 2010 in formulating

Instructions : •Use Microsoft word 2010 in formulating your answers. •Write the answers in your language and avoid copying from the internet. Answer the following questions: 1. What is management? Define it using your ow ...

Personnel tests are designed to test a jobapplicants

Personnel tests are designed to test a jobapplicant's cognitiveand/or physical abilities. A particular dexterity test is administered nationwide by a private testing service. It is known that for all tests administered l ...

Comprehensive problemuse what you have learned about the

Comprehensive Problem Use what you have learned about the time value of money to analyze each of the following decisions: Decision #1: Which set of Cash Flows is worth more now? Assume that your grandmother wants to give ...

We briefly mentioned the synthetic call which consists of

We briefly mentioned the synthetic call, which consists of stock and an equal number of puts. Assume that the combined value of the puts and stock exceeds the value of the actual call by less than the present value of th ...

Questions1 calculate the value of a bond with pound100 face

Questions: 1) Calculate the value of a bond with £100 face value, 5 years to maturity, coupon rate of 7% p.a. paid annually, when the discount rate (expected rate of return on similar instruments) is 4% p.a. 2) Calculate ...

Assignmentbullcompare the results of the three methods by

Assignment • Compare the results of the three methods by quality of information for decision making. Using what you have learned about the three methods, identify the best project by the criteria of long term increase in ...

A company wants to enter into a commitment to initiate a

A company wants to enter into a commitment to initiate a swap in 90 days. The swap would consist of four payments 90 days apart with the underlying being LIBOR. Use the term structure of LIBOR as given below to solve for ...

What is the signaling theory of mergers what is the

What is the signaling theory of mergers? What is the relationship between signaling and the mode of payment used in acquisitions? Is there a relationship between the mode of payment used in acquisitions and the level of ...

For each of the following situations determine whether a

For each of the following situations, determine whether a long or short hedge is appropriate. Justify your answers. a. A firm anticipates issuing stock in three months. b. An investor plans to buy a bond in 30 days. c. A ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

WalMart Identification of theory and critical discussion

Drawing on the prescribed text and/or relevant academic literature, produce a paper which discusses the nature of group

Section onea in an atwood machine suppose two objects of

SECTION ONE (a) In an Atwood Machine, suppose two objects of unequal mass are hung vertically over a frictionless

Part 1you work in hr for a company that operates a factory

Part 1: You work in HR for a company that operates a factory manufacturing fiberglass. There are several hundred empl

Details on advanced accounting paperthis paper is intended

DETAILS ON ADVANCED ACCOUNTING PAPER This paper is intended for students to apply the theoretical knowledge around ac

Create a provider database and related reports and queries

Create a provider database and related reports and queries to capture contact information for potential PC component pro