Ask Question, Ask an Expert


Ask Basic Finance Expert

Assignment: You are interested in proposing a new venture to management of your company. Pertinent financial information is described below.


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 you have a distribution x with mean 29 and

Suppose you have a distribution, X, with mean = 29 and standard deviation = 6. Define a new random variable Y = 4X - 5. Find the mean and standard deviation of Y. a) E[Y] = 111; σY= 19 b) E[Y] = 116; σY= 96 c) E[Y] = 111 ...

Do the following problems1the country of luta has large

Do the following problems 1. The country of Luta has large capital flows with the U.S.It has no trade with the U.S, and will not have trade with the U.S. in the future. Its interest rate is 6%, the same as the U.S. inter ...

Write an analysis in which you include the

Write an analysis in which you include the following: • Select two publicly traded companies within the same industry and present the DuPont analysis for each of these companies. Explain how the debt has served to influe ...

What is the price of a consol with a coupon payment of 200

What is the price of a consol with a coupon payment of $200 per year if the interest rate is 10 percent? What is the interest rate on a consol if the coupon payment is $400 and the price of the consol is $8,000?

Define default risk asymmetric information adverse

Define default risk, asymmetric information, adverse selection, moral hazard, interest rate risk, liquidity risk, and exchange rate risk.

Budgeting with real optionsa capital investment project

Budgeting with Real Options A capital investment project that generates new opportunities is more valuable than one that doesn't. A flexible project, one that does not commit management to a fixed operating strategy is m ...

An online buying club offers a membership for 300 for which

An online buying club offers a membership for $300, for which you will receive a 10 percent discount on all brand-name items you purchase. How much would you have to buy to cover the cost of the membership?

What is the future value of 100 a month for 48 years at 8

What is the future value of $100 a month for 48 years at 8 percent interest? Assume monthly compounding. What is the future value of $100 a month for 41 years, beginning today at 8 percent interest? Assume monthly compou ...

Why are the carry trade profits may so small relative to

Why are the carry trade profits may so small relative to the initial capital borrowed? Compare how much the dollar depreciated against the yen to the size of the interest differential.

Predicting the feds actions assume the following conditions

Predicting the Fed's Actions : Assume the following conditions. The last time the FOMC met, it decided to raise interest rates. At that time, economic growth was very strong and so inflation was relatively high. Since th ...

  • 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