Khc is considering an investment project that requires a

Assignment Help Finance Basics

Reference no: EM13620537

KHC is considering an investment project that requires a new machine for producing special tools. This new machine costs $1,000,000 and will be depreciated over 10 years on a straight-line basis toward zero salvage value. KHC paid a consulting company $50,000 last year to help them decide whether there is sufficient demand for the special tools. In addition to the investment on the machine, KHC also invests $30,000 in net working capital but decides NOT to recoup the net working capital at the end of the investment project. The company pays $45,000 in interest expenses annually. KHC has estimated the performance of the new machine and believes that the new machine will produce $350,000 per year in sales, $130,000 per year in cost of goods sold, and $25,000 per year in administrative expenses.

In order to get an estimate of cost of capital, KHC collect the following information. KHC has 310,000 shares of common stock outstanding, 15,000 shares of preferred stock outstanding, and 8,000 issues of corporate bond outstanding. The bonds have face value $1,000 and coupon rate 6%. The bonds make semiannual coupon payments, have 25 years to maturity, and sell for 131.472% of par. The common stock sells for $56 per share and has a beta of 1.05. KHC's next common stock dividend is expected to be $2.80 per share, and the common stock dividend is expected to grow at 7.7% indefinitely. The preferred stock sells for $72 per share and pays $4.5 annual dividend. The market risk premium is 8%, T-bills are yielding 4.5%, and KHC's tax rate is 25%.

Use the above information to answer these questions.

1 How much money does KHC need to spend to start the investment project (i.e., project cash flow at time 0)?

a.$30,000

b.$2,530,000

c.$2,030,000

d.$1,030,000

2 What is the annual project cash flow expected to be generated from the investment project?

a.$100,000

b.$297,500

c.$137,500

d.$171,250

3 What is the after-tax cost of debt for KHC?

a.4%

b.3%

c.5%

d.2%

4 What is the cost of preferred stock for KHC?

A) 16

B) 6.25%

c) 6.25

D) 16%

5 What is the cost of equity for KHC by using the dividend growth model?

a) 12.7%

b) 9.5%

c) 13.1%

d) 10.2%

Reference no: EM13620537

Questions Cloud

When cities pass laws limiting the rent landlords can : when cities pass laws limiting the rent landlords can charge on apartments the laws usually apply to existing buildings

An ambulance moving at 42 ms sounds its siren whose : an ambulance moving at 42 ms sounds its siren whose frequency is 450hz. a car is moving in the same direction as the

Seawater contains gold too at about 1 part per trillion by : ore from gold mines is about 0.02 gold by mass. seawater contains gold too at about 1 part per trillion by volume. gold

An electron accelerated from rest through a voltage of : an electron accelerated from rest through a voltage of 490v enters a region of constant magnetic field. if the electron

Khc is considering an investment project that requires a : khc is considering an investment project that requires a new machine for producing special tools. this new machine

Write a matlab program that determines the probability of 4 : write a matlab program that determines the probability of 4 of a kind in a 5-poker draw. dont use formula. create a

Assume that none of the alpha particles bounced back from : a physicist has developed a device that generates a beam of alpha particles each of which is a helium nucleus

The isentropic efficiencies of turbine and compressor are : question1a piston cylinder device contains 25 g of saturated water vapor that is maintained at constant pressure of 300

Nanometrics inc has a beta of 367 if the market return is : nanometrics inc. has a beta of 3.67. if the market return is expected to be 13.00 percent and the risk-free rate is

User Account

All Pages