Reference no: EM131881297

Assignment

Burton currently has $850,000 of long-term debt outstanding, 5,000 shares of preferred stock ($10 par) with a market price of $12, and 20,000 shares of common stock ($20 par) with a market price of $53 per share.

They have used a WACC of 14% in the past to evaluate projects but want to determine their current required return for new investments.

Debt: Burton can sell a 10-year, $1,000 par value, 7 percent annual coupon bond for $975. A flotation cost of 2 percent of the face (par) value would be required. Additionally, the firm has a marginal tax rate of 34 percent.

Preferred Stock: Burton pays $1 dividends annually on their preferred shares. The shares are currently selling for $12 in the secondary market. They do not have plans to issue any additional preferred stock.

Common Stock: Burton's common stock is currently selling for $53 per share. The dividend expected to be paid at the end of the coming year is $4. Its dividend payments have been growing at a constant 3% rate.

It is expected that to sell all the shares, a new common stock issue must be underpriced $1 per share and the firm must pay 1% of market value per share in flotation costs.

a. Calculate the after-tax cost of debt 5.05%

b. Calculate the cost of preferred equity 8.33%

c. Calculate the cost of common equity 10.77%

d. Calculate the WACC 8.26%

e. Re-calculate the NPV for the project in #1 above using this new WACC.

f. Should Burton accept the project when considering this revised cost of capital?

JUST LOOKING FOR E AND F.

THIS IS FOR THE CASH FLOWS

3. Burton, a manufacturer of snowboards, is considering adding a more sophisticated machine. The following information is given.

• The proposed machine will cost $120,000 and have installation costs of $15,000. I

t will be depreciated using a 5 year MACRS recovery schedule. It can be sold for $10,000 after five years of use (at the end of year 5).

• The incremental earnings before taxes and depreciation (EBITDA) are projected to be:

o Year 1: 43,000, Year 2: 45,000, Year 3: 46,000, Year 4: 49,000, Year 5: 53,000

• Burton pays 34 percent taxes on ordinary income and capital gains.

• They expect a large increase in sales so their Net Working Capital will increase by $20,000.

• The maximum payback period allowed is 4 years.

• They are currently using a WACC of 14% to evaluate investment projects.

a. Calculate the initial investment required for this project $155,000

b. Determine the incremental after-tax operating cash flows (Y0)-155,000,(Y1) 32,947,(Y2)34155,(Y3)26441,(Y4)22279,(Y5)36102

c. Find the terminal cash flow for the project $41,718

d. Find the Payback period, NPV, IRR, and MIRR. Payback 3.90 years, NPV -3076 IRR 13.23%, MIRR 11.54%

e. Should the new machine be purchased? Why or why not? NO, NPV is Negative.