Reference no: EM133379885

Case: Electro Ltd is a stable growth firm that is considering investing in a new component which requires a $100,000 investment in new capital equipment and $5,000 in additional net working capital. The investment is expected to provide cash flows over the next five years. The anticipated earnings for the investment are found in Table A below.

Table A

Project pro-forma income statement
	2016	2017	2018	2019	2020
Revenues	100,000	105,000	110,250	115,763	121,551
Less: COGS	(40,000)	(42,000)	(44,100)	(46,305)	(48,620)
Gross Profit	60,000	63,000	66,150	69,458	72,930
Less: Oper. Exp	(20,000)	(21,000)	(22,050)	(23,153)	(24,310)
Less: Dep. Exp.	(20,000)	(20,000)	(20,000)	(20,000)	(20,000)
Net Oper. Income	20,000	22,000	24,100	26,305	28,620
Less: Int. Exp	(3,200)	(3,200)	(3,200)	(3,200)	(3,200)
Earnings before tax	16,800	18,800	20,900	23,105	25,420
Less: tax	(5,040)	(5,640)	(6,270)	(6,932)	(7,626)
Net income	11,760	13,160	14,630	16,173	17,794

Using the information provided, calculate the project free cash flow for each year. (Increased investment in NWC is: $250, $262.50, $275.63, and $289.41, for years 2016-2019 respectively. All of investments in net working capital will be liquidated in final year, 2020). The tax rate is 30%.

2, Assuming the project cost of capital is 11.24%, calculate the project's NPV.

3.Electro Ltd is considering the adoption of economic profit as a performance evaluation tool. Calculate the project's annual economic profit using the invested capital figures found in Table A. How are your economic profit estimates related to the project's NPV?

4.Considering the cost of equity for Electro Ltd to be 14%, an EPS of 1.13, and a dividend payout ratio of 48%, how much is the estimated growth rate of dividends using the Gordon growth model?

5. Using information in part d, estimate the current share price for Electro Ltd using the Gordon growth model.