Ask Question, Ask an Expert


Ask Corporate Finance Expert

problem 1

Omega Medical Group (OMG) manufactures high precision medical equipment. OMG has spent €20m on research and development (R&D) for a new system to administer medical isotopes used in diagnostic imaging. The device is expected to be approved by the regulatory authorities shortly and OMG is now starting to plan for production to start in 12 months time. The costs to complete the regulatory approval process are estimated to be €80m. OMG expects to sell a total of 12,000 of the devices at a fixed price of €30k over the planned production life of four years.

Initial investment for the additional plant and machinery for this project is €525m. The project will also require an increase in working capital of €50m. The working capital will be released at the end of the project. The incremental annual operating costs will be €120m. Production is expected to finish at the end of four years and all the equipment will be disposed of. Some parts of the plant are potentially dangerous and will need to be disposed of in an environmentally friendly way. There will be a net disposal cost of €40m. All cash flows are in today’s money and inflation is expected to be 2.5% per annum (p.a.) over the next five years.

Currently, investment in plant and equipment is eligible for capital allowances on a straight-line basis over four years. The applicable corporate tax rate is 28%. Capital allowances are received by OMG in the same year that they are claimed but taxes on profits are paid one year in arrears.

OMG’s shares are listed on the Paris Stock Exchange where they currently trade at €2.50 with an equity beta of 1.2. The expected equity risk premium is 10% p.a. and risk-free rate is 3% p.a. OMG currently has a market debt to equity ratio (D/D+E) of 40%. The current average before tax cost of borrowing for the company is 6% p.a. Inflation is 2.5% p.a. and is likely to remain so over the life of the project.


(a) Estimate the weighted average cost of capital (WACC) for OMG.

(b) Carry out a DCF analysis of the project based on the information given and find out the net present value (NPV), internal rate of return (IRR) and payback of the project. Advise OMG whether the project is financially viable. Briefly describe the reasoning behind your decision. Also mention any reasons for excluding any of the information given above and describe any additional assumptions you have made whilst making your calculations.

(c) OMG are negotiating a new debt facility to provide additional funds to fund a whole new series of projects and product upgrades. The new capital structure will result in OMG’s market debt to equity ratio (D/D+E) increasing to 50%. As a consequence of the increased gearing, the before tax cost of debt will increase to 8%. The increased gearing will also change the equity market’s perception of risk at OMG. Refind out WACC for OMG and refind out your NPV for the project. Does this change your previous recommendation?

Corporate Finance, Finance

  • Category:- Corporate Finance
  • Reference No.:- M91678

Have any Question? 

Related Questions in Corporate Finance

International finance questions-q1 what are international

International Finance Questions- Q1. What are International debt sources of funds? Why are they important for success of large Indian companies? What are the risks associated and how can they be dealt? Q2. How does Proje ...

How are the goals of full employment and stable prices

How are the goals of full employment and stable prices related to the long- run goal of economic growth? How can policy makers affect long- run growth?

Paperevaluation of corporate performancethe paper will

Paper Evaluation of Corporate Performance The Paper will involve applying the concepts learned in class to an analysis of a company using data from its annual report. Using the concepts from this course, you will analyze ...

Assignment company valuationusing the internet or strayer

Assignment: Company Valuation Using the Internet or Strayer databases, research Facebook's Initial Public Offering (IPO) and subsequent financial performance. Based on your research: Write a five to six page paper in whi ...

Why does a company in financial distress with an

Why does a company in financial distress with an underfunded pension scheme have an incentive to invest in equities rather than bonds?

For this assignment you will write a three to four page

For this assignment, you will write a three to four page research paper in which you describe the different types of credit used by your manufacturing company. In this paper, please address the following questions: • Wha ...

Corporate financial management assignment - case

Corporate Financial Management Assignment - Case study Overview: You are acting as the CEO of New Heritage Doll company, and you need to decide which investment projects can create value for shareholders' wealth. Your ta ...

Aes case study essay excel sheet and case study pdf will be

AES Case study essay. Excel sheet and case study pdf will be provided. 2 pages needed. Just number 3 needed to be answered 1. How would you evaluate the capital budgeting method used historically by AES? 2. What is an ap ...

Regulation of financial institutionsnbsp financial

Regulation of Financial Institutions:  Financial institutions are subject to regulation to ensure that they do not take excessive risk and can safely facilitate the flow of funds through financial markets. Nevertheless, ...

Analyzing the dividend policies of various companiesplease

Analyzing the Dividend Policies of Various Companies Please recall the company that you selected for the Module 1 SLP. Please review the company's dividends over the past three years. Then, answer the following questions ...

  • 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

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate