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Awesome Gadgets (AG) produces keyboards for the computer industry. AG has managed to be debt free to date. There are 50,000 ordinary shares outstanding, with a market capitalization of $1 million. Equity holders require a return of 5 percent on their investment.
AG intends to diversify by manufacturing a new line of carbon fibre model keyboards. This venture will not raise the risk level of the company. The equipment to make such keyboards cost $10,000, which will be the depreciable base. AG uses straight-line depreciation for its non-current assets. The equipment is expected to last 2 years, at which time the equipment will be sold for $1,000 (after tax).
The expected demand is 500 keyboards per year. Each new keyboard will be priced at $10 in the first year and thereafter rise at 5 percent per year. Total variable costs are expected to be $2 per computer. The corporate tax is at 10 percent.
Required
1. Compute the value added to the company if it diversifies.
2. What is the price per share of WSC if the new investment is undertaken? Make a reasoned recommendation on the new investment.
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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