Question

welve Problems Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI). a large, publicly traded firm that is the market share leader in radar detection systems (RDSS). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $5.5 million after taxes. In five years, the land will be worth $5.8 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $21.2 million to build. The following market data on DEI's securities are current: Debt: 60.000 6.2 percent coupon bonds outstanding, 25 years to maturity, selling for 98 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock 1350000 shares outstanding, selling for $97 per share; the beta is 1:15 Preferred stock: 90,000 shares of 5.7 percent preferred stock outstanding, par value of $100, selling for $95 per share. Market: 7 percent expected market risk premium; 3.8 percent risk-free rate. DES tax rate is 25 percent. The project requires $825,000 in initial net working capital Investment to get operational. a in dollars, not Do not round in costs. (A neg calculate the project's Time O cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI's project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g.. 32.16.) The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (.e., the end of year 5), the plant can be Scrapped for $2.4 million. What is the aftertax salvage value of this manufacturing plant in intermediatellationen antara anwar in Hollare < Prev 5 or 5 MacBook Air

Answer 1

1-
Time 0 cash flow
investment in manufacturing plant		-21200000
investment in working capital		-825000
Time 0 cash flow		-22025000
2-
weighted aveage cost of capital
before tax cost of debt =using rate function in MS excel	rate(nper,pmt,pv,fv,type) nper = 25*2 =50 pmt = 1000*6.2%*1/2 = 31 pv =1000*98% =980 fv =1000 type =0		3.18%
annual cost of debt	3.18*2	6.36%
after tax cost of debt	6.36*(1-.25)	4.77
cost of preferred stock =preferred dividend/market price	5.7/95	6.00%
cost of common stock =risk free rate+(market risk premium)*beta	3.8+(7)*1.15	11.85
weighted aveage cost of capital
source		value	weight	component cost	weight*component cost
debt		58800000	0.29652042	4.77	1.414402421
preferred		8550000	0.04311649	6	0.258698941
common stock		130950000	0.66036309	11.85	7.825302572
total		198300000
WACC = sum of weight*component cost					9.50
Appropriate discount rate = WACC + 2%	9.5+2	11.50%
3-
Book value of plant =cost of plant -(annual depreciation*period of use of machine)	21200000-(2650000*5)	7950000
annual depreciation	21200000/8	2650000
sale proceeds of plant		2400000
loss on disposal of plant	7950000-2400000	5550000
tax credit on loss on disposal of plant	5550000*25%	1387500
after tax salvage value of plant	2400000+1387500	3787500