Reference no: EM132968248
You are asked to do a capital budgeting evaluation of a new project. The purchase price of machinery is $810,000. The equipment would depreciate according to the 7-year MACRS class (use the depreciation percentages provided in Exhibit 2 below). It is anticipated that the variable operating costs, excluding depreciation, will be approximately 40 percent of sales. In the project's first year, incremental fixed costs (maintenance, etc.) are projected to be $25,000. In each of the remaining years, this fixed cost component is projected to increase by 2% over the preceding year.
- The firm anticipates that it will have to make incremental working capital investments to parallel the expected changes in sales. Analysis has resulted in the estimate that a proper working capital requirement figure would be 8 percent of sales (i.e., the incremental NWC investment (or recovery) at time t will be 8% of the change in sales between time t, and t + 1 such that cumulative investments in NWC made over the life of the project would be fully recovered in the project's final year). The machinery is expected to be sold for a before-tax scrap value of $120,000 at the end of year 6. The sales projections (revenues) anticipated for this investment.
The weighted average cost of capital (WACC) of the project is the same as the firm's WACC. You also know:
- The firm has 15,000,000 shares of common stock outstanding that are trading for $18.20 per share.
- Risk-free rate is 1.62%, equity Beta is 1.4, market risk premium is 6.5%, and marginal tax rate is 21% .
- The firm's bonds have 6% coupon rate, a $1,000 face value, pay semi-annual coupons, and mature in 15 years. There are 100,000 of these bonds outstanding that are currently selling in the open market for $960 per bond.
Year Sales Projection
1 $300,000
2 $420,000
3 $510,000
4 $600,000
5 $480,000
6 $360,000
7-year MACRS schedule
Year Depreciation
1 14.29%
2 24.49%
3 17.49%
4 12.49%
5 8.93%
6 8.92%
7 8.93%
8 4.46%
Problem A) What is the cost of equity? Please keep 4 decimal points
Problem B) What is the cost of debt before taxes? Please keep 4 decimal points
Problem C) What is the free cash flow for Year 0?
Problem D) What is the free cash flow for Year 1?
Problem E) What is the free cash flow for Year 6?
Problem F) What is the NPV of the proposed project?
|
Will meet the recognition criteria be recorded in financial
: Will meet the recognition criteria, and if so, be recorded in the financial statements as an asset? Green Ltd has acquired the Australian rights at a cost.
|
|
Why woolworths decide to enter the hardware industry
: What are the industries in which Woolworths has been an active acquirer (use the excel sheet on slide 48) and Why did Woolworths decide to enter the hardware
|
|
Orders from the east coast warehouse
: 1) A chi-square goodness of fit test is to be performed to see if data fit the Poisson distribution. There are 8 categories, and lambda must be estimated. Alpha
|
|
What is company xyz intrinsic enterprise value
: What is Company XYZ's intrinsic enterprise value under the High Case, using the WACC as the discount rate and assuming the terminal value
|
|
What is the free cash flow for year zero
: What is the free cash flow for Year 0? The firm's bonds have 6% coupon rate, a $1,000 face value, pay semi-annual coupons, and mature in 15 years.
|
|
Prepare journal entries to record issuance of stock options
: Prepare journal entries to record issuance of the stock options, termination of stock options, exercise of stock options, and charges to compensation expense
|
|
Explain the application of that technique in practice
: Interest rates have been a focus of the material in the subject this semester. List 5 instances in the subject where a technique, example or theory.
|
|
Show the steps in the borrowing hedge
: Show the steps in the borrowing hedge, outlining the underlying and futures positions and the net cost of funds if interest rates rise to 7% p.a.
|
|
Show that the value of the bond portfolio at duration date
: Show that the value of the bond portfolio at the duration date (ie. in 15 month's time) will be sufficient to meet the liability whether interest rates
|