Reference no: EM132618667
1. In optimal capital allocation process the company capital budgeting is the most determinate factor. Leveraged company always considers capital structure that would produce list weighted average cost of capital. Therefore the META BEER FACTORY manager detriment to source it capital in the following manner. 54% from Debt, 34 percent from Preferred stock and 12 percent from common stock (retained earnings). Addition to retained earnings at the end of last year was $ 124 million. The company is well structured one and he can access preferred stock from a company paid dividend at a price of 12 per share and now selling at open market at $93.00. The company borrowed new debt with 12% interest rate. The marginal tax prevalent is 40%. Besides this the company determines to reinvest dividend from existing shareholders. This stock risk free return is 8% and expected return is 14%. This family of common stock has significant risk level is 0.65. The company considers market risk to value common stock price. Considering all relevant factors:
A. What is the weighted average cost of capital?
B. What is the retained earning breakpoint?
2. This Meta Beer factory produces beer to different group of customers. They have developed a new beer project called ZEMEN considering market risk posed by Heineken, which claims to provide product with additional test. The marketing department has estimated sales to be 40 million bottles a year at a price of $2.5 per bottle. Research and development costs have already amounted to $400,000. The new product can be produced from the existing plants, but new machinery is required costing $5 million in each of five plants in the year 2006. Production and sales would begin in 2007. Advertising and promotion costs in the first year are estimated at 10 per cent of sales revenues, going down to 5 percent in later years, with the product having a life of four years. Variable production costs are estimated at 30 per cent of sales revenues, with fixed overhead costs being $4 million per year, excluding depreciation. Besides this the following occurrences affected the incremental cost and revenue of industry.
a. Meta Beer factory may be currently producing a similar product, Meta X, and net cash inflows from this product may be reduced by $1.5 million for the first two years of the project.
b. Meta Beer factory have inventories on hand of 10 per cent of the estimated cost of sales (cost of goods sold or total variable cost incurred to produce items totally sold) at the beginning of 2007.
c. Due to inflation Assume that variable costs, overheads and prices all increase by 2 per cent per year (in 2008 and 2009).
d. Tax margin was 40%
e. Deprecation of plants and equipments is 25% per year.
Therefore
- Considering assumptions above Estimate each year cash flow from the operation.
- Considering the following points identify the total cash outlay.
- Consider WACC you produced above on question No.3 do you accept or reject the new project (use NCBR method to evaluate the new project-launching Zemen