What is the initial net cash outlay

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Reference no: EM131676236

PROBLEM 1 - NPV and Weighted Average Cost of Capital

Hilliard Corp. wants to calculate its weighted average cost of capital (WACC). The company's CFO has collected the following information:

The company's long-term bonds currently offer a coupon of 7 percent and were sold at par value.
The company's stock price is $35 per share.
The Risk-free rate is currently 3%
The company's seeks to havea Debt/Equity ratio of 2/3.
The company's tax rate is 35%.
The industry Beta is 1.20.
The Market Return is 9.5%.

Part 1. What is the company's WACC?

Part 2: Next, Assume Hilliard is considering the replacement of one of its machines. The project's risk is similar to the firm's average operations. The old machine is being depreciated by the straight-line method over a 10-year recovery period from a depreciable cost basis of $120,000. The old machine has 5 years of remaining usable life, at which time its salvage value is expected to be zero, and it can be sold now for $40,000. This machine has a current book value of $60,000, so a $20,000 capital loss will be incurred on the sale.

The purchase price of the new machine is $200,000. It has a 5-year life and an expected salvage value of $25,000. Annual savings of electricity, labor, and materials from use of the new machine are estimated at $50,000. The company is in a 35 percent federal-plus-state tax bracket. The MACRS depreciation method will be used and the recovery percentages for assets with a 5-year class life are given below:

Year	Recovery Allowance Percentage
1	20%
2	32
3	19
4	12
5	11
6	6
	100%

Guiding Questions:

a. What is the initial net cash outlay if we move forward and buy the new machine?

b. Illustrate the cash flows from assets (OCF, NCS, changes in NWC) using a time line?

c. What is the cash flow from salvage value in Year 5?

d. Determine cash flows from assets (CFFA) in Years 1-5

e. Should the new machine be purchased? Why or Why Not?

Problem 2: Mergers

T-Mobile and Sprint are talking about a Merger! Most Mergers do not add value - so why is this merger being considered.

Discuss the benefits (synergies) related to this merger and provide your opinion of whether or not you believe each of the synergies will be realized.
If you were involved in this Merger what difficulties (potential pitfalls) do you believe T-mobile and Sprint need to pay special attention to in order to be successful?
What issues could keep this Merger from proceeding?
Do you believe this is a "good" merger? Why?

Reference no: EM131676236

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