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Your company already has spent $75,000 to conduct market research about the demand for the product, which indicates the optimal wholesale price for the product would be $15.50 per unit, based on the prices of similar products that competitors sell. The market research also indicates that demand for the product would last for five years. At a price of $15.50 per unit, the market research suggests that sales would be 100,000 units in the first year, and unit sales would increase 5% per year over the remaining four years of the product’s life. Your company’s production manager estimates manufacturing the product would require a machine that costs $800,000, and falls in the 3-year MACRS depreciation class. The machine’s expected salvage value in five years is expected to be $75,000. The production manager also estimates the product’s variable costs, consisting of raw materials and labor, would be $9.35 per unit, and the annual fixed costs excluding depreciation would be $300,000. He states the product could be manufactured in a building for which your company has no other use. Your company’s stock price is $74.61 per share, the last annual dividend was $2.50 per share, and market analysts who follow your company’s stock expect the dividends to grow forever at a rate of 5.5% per year. The company’s beta is 1.43 and Treasury bills are paying 2.5% per year. The company’s bonds have a par value of $1,000, pay a coupon of 5.5% per year, semiannually, have 17 years to maturity, and are trading at $925. The company’s treasurer estimates that the new product would require a $300,000 increase in net working capital. She also has told you the company’s target capital structure is 40% debt and 60% equity, the company’s tax rate is 35%, and she expects the stock market return over the next year will be 7.0%. Make into a chart for an excel sheet.

Financial Management, Finance

  • Category:- Financial Management
  • Reference No.:- M92418280

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