a. Project's initial Time 0 cash flows: | |
Cost of plant & equipment | 32480000 |
After-tax sale value lost on land(5900000*(1-35%)) | 3835000 |
Initial NWC | 1450000 |
Intial time 0 cash flows | 37765000 |
b.Weighted Average Cost of Capital --discount rate |
After-tax cost of Bond |
Using the formula, to find bond price, |
Price=(Pmt.*(1-(1+YTM)^-n)/YTM)+(FV/(1+YTM)^n) |
where, |
Price=the curent market price less flotation costs,ie. 1000*1.08*(1-4%)= 1036.8 |
Pmt.=the semi-annual coupon amt.--ie. 1000*7.2%/2= 36 |
YTM=The reqd. semi-annual before-tax cost/ Yield ---to be found--?? |
n= no.of semi-annual coupon periods still to maturity--25 yrs. *2= 50 |
FV=Face value to be recd. At maturuty, ie. $ 1000 |
Plugging these values, in the formula, |
1036.80=(36*(1-(1+YTM)^-50)/YTM)+(1000/(1+YTM)^50) |
Solving the above , we get the before-tax semi-annual cost of the bond as |
3.44% |
so , the annual before tax cost= |
(1+3.44%)^2-1= |
7.00% |
Now, the annual after-tax cost of the bond= |
Annual Before-tax cost*(1-Tax Rate( |
ie. 7%*(1-35%)= |
4.55% |
Cost of new common stock |
as per CAPM, |
Cost of equity, ke=RFR+U/w spread+(beta*MRP) |
ie. 5%+8%+(1.1*7%)= |
20.70% |
Cost of Preferred stock |
k ps=$ dividend/(net proceeds of the new issue) |
ie.(100*5%)/(81.60*(1-6%)) |
6.52% |
The WACC= (Wt.d*kd)+(Wt.e*ke)+(Wt.ps*kps) |
Now we can claculate WACC by tabulating as follows: |
Type of capital | Mkt. value | Wt. to total | Cost (as above) | Wt. *Cost | |
Debt | 236000*1000*1.08= | 254880000 | 26.41% | 4.55% | 1.20% |
Common stock | 9400000*71.60= | 673040000 | 69.74% | 20.70% | 14.44% |
Preferred stock | 456000*81.60= | 37209600 | 3.86% | 6.52% | 0.25% |
Total | 965129600 | 100.00% | WACC= | 15.89% | |
Add:Adj. factor | 2% | ||||
Discount rate to use | 17.89% |
c. After-tax salvage value: | |
Cost to build | 32480000 |
Less:Acc. Depn. At end of yr. 5(32480000/8*5) | 20300000 |
Carrying value at end Yr.5 | 12180000 |
Salvage at end yr. 5 | 5100000 |
Loss on salvage | 7080000 |
Tax expense saved on loss at 35%*loss | 2478000 |
ATCF on salvage(salvage+tax saved) | 7578000 |
PLUS | |
ATCF on sale of land | |
(6300000*(1-35%)= | 4095000 |
Total ATCF at end yr. 5 | 11673000 |
d.Annual operating cash flows: | |
Sale value (11100*20000) | 222000000 |
Less: Variable cost(9700*20000) | -194000000 |
Less: Fixed costs | -7400000 |
Less: Deprecaition(32480000/8) | -4060000 |
EBT | 16540000 |
Less: Tax at 35% | -5789000 |
EAT | 10751000 |
Add back: Depn. | 4060000 |
Annual OCF | 14811000 |
e.Accounting break-even Qty.=(Fixed costs+depreciation)/(Selling price/unit-Variable costs/ unit) |
ie.(7400000+4060000)/(11100-9700)= |
8186 |
RDSs |
f. IRR & NPV | ||
Intial time 0 cash flows | 37765000 | |
Annual OCF | 14811000 | |
Total ATCF -salvage at end yr. 5 | 11673000 | |
Initial NWC recovered at end Yr.5 | 1450000 | 13123000 |
Discount rate | 17.89% | |
NPV=-37765000+(14811000*3.13498)+(13123000*0.43915)= | ||
14430154 | ||
(P/A, i=17.89%, n=5) 3.13498 | ||
(P/F, i=17.89%,n=5) 0.43915 | ||
IRR= | ||
0=-37765000+(14811000*(1-(1+r)^-5)/r))+(13123000/(1+r)^5) | ||
solving for r, we get IRR= 32.32% | ||
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...
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 $5.4 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
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 $4.1 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
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 $7 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
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 (RDS). 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 $7.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
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 $7.1 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
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...
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...
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...
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 $7 million in anticipation of using it as a toxic dump site for waste chemicals, but it...
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 $7.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it...