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 management of your company. Pertinent financial information is described 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

A) Last year’s sales were $225,000,000.

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

C) You as well 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 would incur a $3.00 per share flotation cost.

D) The company has 10 million shares of common stock outstanding with the currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 %. The last dividend (D0) was $.80. New stock could be sold with flotation costs, comprising market pressure of 15 percent.

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

F) Stockholders need a risk premium of 5 % above the return on the firms bonds.

G) The firm expects to have additional retained earnings of $10 million in the coming year and expects depreciation expenditures of $35 million.

H) Your firm doesn't use notes payable for the long-term financing.

I) The firm considers its present market value capital structure to be optimal and wishes to maintain that structure.

J) The firm is presently employing its assets at capacity.

K) The firm’s management needs a 2 % adjustment to the cost of capital for risky projects.

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

M) Your firm’s dividend payout ratio is 50 %, and net profit margin was 8.89 %.

N) The firm has the given 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 would comprises of a new product introduction (You should label your venture as Project I, for “introduction”). You estimate that your product will have a 6-year life span, and the equipment employed to manufacture the project falls into the MACRS 5-year class. Your venture would need a capital investment of $15,000,000 in equipment, plus $2,000,000 in installation costs. The venture would as well result in an increase in accounts receivable and inventories of $4,000,000. At the end of the 6-year life span of the venture, you estimate that the equipment could be sold at a $4,000,000 salvage value.

Your venture, which management considers fairly risky, would raise fixed costs by a constant $1,000,000 per year, while the variable costs of the venture would equal 30 percent of revenues. You are projecting that revenues produced by the project would 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 given list of steps gives a structure which you should use in analyzing your new venture.

Note: Carry all the final compuatations to two decimal places.

problem 1: Find out 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

problem 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 plances.

problem 3: find out the retained earnings break point.

find out 4: Draw the MCCF schedule, comprising depreciation-generated funds in the schedule.

problem 5: Compute the Year 9 investment for Project I.

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

problem 7: find out the additional non-operating cash flow at the end of year 6.

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

problem 9: find out the IRR and payback period for Project I

problem 10: Draw the IOS schedule including Project I all along with the Projects A-F

problem 11: Determine your firm’s cost of capital.

problem 12: Point outwhich projects must be accepted based on your MCC and IOS schedules and why?

problem 13: Compute 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 find out to be of average risk?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M91293

Have any Question? 


Related Questions in Basic Finance

Suppose a central bank is trying to decide whether to

Suppose a central bank is trying to decide whether to target money growth. Proponents of the move are confident that the new policy would be successful as, under the existing policy regime, they observed a stable statist ...

How the fed should respond to prevailing conditions

How the Fed Should Respond to Prevailing Conditions : Consider the current economic conditions, including inflation and economic growth. Do you think the Fed should increase interest rates, reduce interest rates, or leav ...

A small eastern european economy asks your opinion about

A small Eastern European economy asks your opinion about whether they should pursue the path to joining the European Economic and Monetary Union (EMU) or simply "euroize" (i.e., dollarize by using the euro for all domest ...

1 assume that a public corporation has 10000000 shares

1. Assume that a public corporation has 10,000,000 shares outstanding. First, you are to create the necessary Balance Sheets and Income Statements and then calculate the annual Cash Flow from Assets (aka: CFFA or Free Ca ...

Assume toy corp undertakes a plan to move toward its

Assume tOY Corp. undertakes a plan to move toward its optional capital structure by issuing debt and using the proceeds to repurchase equity. The corresponding increase in the company's debt ratio will typically have no ...

Critically evaluate the role of derivatives in managing

Critically evaluate the role of derivatives in managing corporate risk. What are the broader implications of using derivatives to hedge risk, particularly in light of the role of derivative instruments in the recent fina ...

Consider again the transactions data of 3m stock in

Consider again the transactions data of 3M stock in December 1999. (a) Use the data to construct an intraday 5-minute log return series. Use the simple average of all transaction prices within a 5-minute interval as the ...

Suppose there are 3 stocks with the same expected return of

Suppose there are 3 stocks with the same expected return of 10% per year and the same risk (standard deviation) of 50%. The correlation between any 2 of them is 0.5. 1) What is the risk of equal-weighted portfolio of 3 s ...

Three marbles are selected from a base plate containing 5

Three marbles are selected from a base plate containing 5 red marbles and 3 green marbles. The number X, which represents the total of red marbles obtained in the selection, is noted. marbles are then placed back on the ...

Assignment-investmentsa general bond and investor

Assignment- INVESTMENTS A. GENERAL BOND AND INVESTOR INFORMATION 1. Briefly discuss the general characteristics of the bond touching on: a. A brief description of the company that issued the bond. b. A brief description ...

  • 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