Reference no: EM131731218

Cash - 2,000,000; Acct Rec - 28,000,000; Inventories - 42,000,000; Net fixed assets - 133,000,000; total assets - 205,000,000 Acct Payable and Accruals 18,000,000; Notes payable- 40,000,000; Long-term debt - 60,000,000; preferred stock 10,000,000; common equity 77, 000, 00 - total claims 205,000,000

Last’s sales were $225,000,000

There are 100,000 shares of $100 par, 9% dividend perpetual stock outstanding. The current market price is $90.00 and any new stock issued would incur a 3.33% per share flotation cost.

The company has 10 million shares of common stock outstanding with a current price of $14.00 per share. The stock exhibits a constant growth rate of 10%. The last dividend (Do) was $.80. The new stock could be sold with flotation cost of 15%.

The risk rate is currently 6% and the rate of return on the stock market as a whole is 14%. Your stock's beta is 1.22.

Stockholders require a risk premium of 5 percent above the return on the return on the firm's bonds.

The firm expects to have additional retained earnings 1$ million in the coming year and expects depreciation expenses of $35 million.

Your firm does not use notes payable for long-term financing.

The firm considers its current market value capital structure to be optimal and wishes to maintain that structure. (Hint: examine the market value of the firm’s capital structure, rather than its book value when determining the weights in the WACC calculations.)

The firm’s management requires a 2% adjustment of the cost of capital for risky projects.

Your firm is federal + state marginal tax rate 40%

The firm has the following investment opportunity currently available in additions 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 consist of new product introductions (called Project I) you estimate that your product will have a 6-year lifespan and the equipment used to manufacture the project falls into the MACRS 5-year class. Your venture would require a capital investment of $15,000,000 in equipment, plus $2,000,000 in installation cost. The venture would also require an initial investment in accounts receivables and inventories of $4,000,000. At the end of the 6-year lifespan of the venture, you can estimate that the equipment could be sold at a $4,000,000-salvage value.

Your venture, which is management risky, would increase the fixed cost by a constant $1,000,000 per year, while the variable cost of the venture would equal 30% of revenues. You are projecting that revenues generated by 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.

Please show the manual calculations for the following: Compute the non-operating (end-of-project) cash flows for your venture.