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

You have a 1100 balance on your 15 credit card you have

You have a $1,100 balance on your 15% credit card. You have lost your job and been unemployed for 6 months. You have been unable to make any payments on your balance. However, you received a tax refund and want to pay of ...

Assume that you have an opportunity to visit a civilization

Assume that you have an opportunity to visit a civilization in outer space. Its society is at roughly the same stage of development as U.S. society is now. Its economic system is virtually identical to that of the United ...

An insurance company checks police records on 1200 randomly

An insurance company checks police records on 1200 randomly selected auto accidents and notes that teenagers were at the wheel in 180 of them. Construct a 90% confidence interval estimate of the proportion of auto accide ...

1 how do researchers maintain the confidentiality of

1. How do researchers maintain the confidentiality of participants' responses? 2. Describe the Milgram (1963) study and discuss the ethical issues it raised. 3. What are the basic ethical principles that animal researche ...

Create a 10-15-slide powerpoint presentation demonstrating

Create a 10-15-slide PowerPoint presentation demonstrating a thorough understanding of the firm you have been evaluating through the class. Be sure to include speaker notes at the bottom of each slide that provide more d ...

Is wall street a casino or an investment in the future and

Is Wall Street a casino or an investment in the future and why? Use examples to back your stances? What do you fear the most about Wall Street and investing in the stock market? Have you learned anything in this module t ...

1 why is variance reduction important to logistical

1. Why is variance reduction important to logistical integration? Illustrate in terms of logistical operations. 2. What is the meaning of the phrase cradle-to-cradle logistics? Discuss the operational differences of orig ...

On august 20 a stock index futures which expires on

On August 20 a stock index futures, which expires on September 20, was priced at 429.70. The index was at 428.51. The dividend yield was 2.7 percent. Discuss the concept of the implied repo rate on an index arbitrage tra ...

1 what are the four basic goals of behavioral research2

1. What are the four basic goals of behavioral research? 2. Distinguish between basic and applied research. In what ways are basic and applied research interdependent?

1 disadvantage of high liquidity what is a disadvantage of

1. Disadvantage of High Liquidity. What is a disadvantage of maintaining a very high level of liquidity? 2. Economic Impact on Liquidity Needs. Assume that your monthly expenses will not change over the next three years, ...

  • 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

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

Describe what you learned about the impact of economic

Describe what you learned about the impact of economic, social, and demographic trends affecting the US labor environmen