Ask Question, Ask an Expert

+1-415-315-9853

info@mywordsolution.com

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.

Required:

(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

Go to Go to

Go to www.philadelphiafed.org/consumer-resources/publications/establish-use-andprotect-credit.cfm and answer the following questions: a. What do lenders look for before lending money? b. After college, how will you go ab ...

Rod and martha have heard about digital cash products such

Rod and Martha have heard about digital cash products such as Bitcoin and are thinking about accepting Bitcoins or some other digital cash from customers in person and online. Using your favorite search engine or the res ...

1 would a write-off of uncollectible accounts against

1. Would a write-off of uncollectible accounts against allowance for doubtful accounts be disclosed on a cash flow statement? Explain. 2. Fully depreciated equipment costing $60,000 was discarded, with no salvage value. ...

See how nonverbal communication affects a speakerworking in

See how nonverbal communication affects a speaker. Working in groups of three or four, have one person tell a three-minute story to the rest of the group. As he or she tells the story, demonstrate negative nonverbal comm ...

Write a letter refusing a customers request for

Write a letter refusing a customer's request for reimbursement. As the president's assistant at the Ford Motor Company, you received a customer letter. The customer complains that her Ford Escort is a "lemon" and has cos ...

After reading case in your text the dangerous morality of

After reading case in your text, "The Dangerous Morality of Managing Earnings," write an essay that includes the following elements: A formal introduction. Discussion of the five generalizations from the findings in this ...

1 discuss methods a builder might use to assist with a home

1. Discuss methods a builder might use to assist with a home buyer's permanent financing. 2. Discuss maximum and minimum dollar limits on loan amounts. 3. When is refinancing a mortgage loan practical? Why? 4. How is loa ...

Assignmentuse the following information for questions 1 and

Assignment Use the following information for Questions 1 and 2: Boehm Corporation has had stable earnings growth of 8% a year for the past 10 years and in 2013 Boehm paid dividends of $2.6 million on net income of $9.8 m ...

1 personal balance sheet what is a personal balance sheet2

1. Personal Balance Sheet. What is a personal balance sheet? 2. Asset Classifications. Name three classifications of assets. Briefly define and give examples of each. 3. Types of Investments. What are bonds? What are sto ...

Sager inc just purchased a 91-day 1 million t-bill that was

Sager Inc. just purchased a 91-day, $1 million T-bill that was selling at a discount of 3.25 percent. a. Calculate the dollar discount and purchase price on this T-bill. b. Find the money market yield (MMY) on this T-bil ...

  • 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