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Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which distributes alcohol, while the other manufactures bottles for brewers and beverage companies. The company is considering a capacity expansion project in the alcohol distribution division, and the Board of Directors has asked you to provide a financial analysis of the project.
? The project would require an initial investment of $100 million for a new distribution center. In addition, $20 million in additional working capital would need to be committed to the project. The working capital will be recovered at the end of the project life. ? The distribution center facilities would be depreciated on a straight-line basis over five years. At the end of five years, you estimate that the center will be sold for $20 million. ? The distribution center is expected to generate cash revenues of $85 million per year and cash operating costs of $50 million per year in each of the next five years. ? The corporate tax rate is 40%. ? The book value of ABC's assets is $20 billion, while the book value of its outstanding debt is $5 billion. ABC's equity has an estimated beta of 1.2. ? The expected return on the market portfolio is 15%, while the risk-free rate of return is 5%. ? ABC could issue new debt at a yield to maturity of 8%. ? Companies that operate purely in the bottle manufacturing industry have an average beta of 1.5 and an average debt-equity ratio (measured at market value) of one quarter. ? Companies that operate purely in the alcohol distribution industry have an average beta of 0.5 and an average debt-equity ratio (measured at market value) of two-thirds. Based on information above, you are to complete the project analysis to present the Board meeting that is scheduled tomorrow. a) Calculate the weighted average cost of capital. b) Calculate the free cash flow of each year for the expansion project. c) What is the NPV for the project?
Calculate each projects payback period cutoff. Which would you accept if Puppy's payback period cutoff is 2 years.
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A firm has earned $5 million in net profits for the year. It decides to pay $3 million in dividends and use the rest to purchase $1 in new machinery and $1 million in raw materials. What is its Retained Earnings?
Assets and costs are proportional to sales. Debt and equity are not. A dividend of $963.60 was paid, and Martin wishes to maintain a constant payout ratio
Find the payback period. Explain what this means in your own words without quoting the definition of payback period. In addition, state whether or not this is considered to be an acceptable payback period.
An all equity plan (PLAN 1) and a levered plan (PLAN 2). Under plan 1 the company would have 200,000 shares of stock outstanding. What is the break even EBIT?
Reynolds Corporation plans to purchase equipment at a cost of $3 million. The company's tax-rate is 30 percent and the equipment's depreciation would be $600,000 per year for 5 years.
Remi, Inc., has sales of $19.9 million, total assets of $14.9 million, and total debt of $5.7 million. If the profit margin is 12 percent.
The firm's new CFO believes that the company could reduce its receivables enough to reduce its DSO to the benchmarks' average. If this were done, by how much would receivables decline? Use a 365-day year.
Find out the present value of a perpetuity of $100 per year if the appropriate discount rate is 7%?
Mandesa, Inc., has current liabilities of $8 million, current ratio of 2 times, inventory turnover of 12 times, average collection period of 30 days, and credit sales of $64 million.
You purchased a new Lan Rover for $67,000 on October 31, 1999. The down payment was $15,000. A bank financed remaining balance at 12% interest rate for five years with monthly payments.
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