Reference no: EM13870286
Part -1:
1. ABC Mining is reviewing purchase of a new machine. Their information is listed below.
Capital structure: 50% debt, 50% equity. Tax 40%
Bond - 15 years to maturity, net selling price $1152, 12% coupon, $1000 par
Common stock - current selling price $50, current dividend D0 $4.20
Growth (constant) 5% Beta 1.2 Rrf 7% rm (market return) 12%
a. What is their after tax cost of capital (rd) for the bond?
b. What is their cost of capital for equity (rs) using CAPM?
c. What is their WACC?
The new machine installed cost is $100,000 and requires minimal increase in NWC (net working capital). It will be sold at the end of year 3 for an anticipated $30,000. Use MACRS 3 yr. (Remember to add the terminal cash flow in when calculating year 3 OCF)
Anticipated cash flows prior to depreciation: Year 1 $40,000
Year 2 $48,000
Year 3 $20,000
d. Calculate the operating cash flows (OCF) for each year.
e. Calculate the NPV for this proposal if the cost of capital is estimated to be 10% and using OCFs from d.
f. What is the project IRR?
g. What is the project payback?
h. What is the project discounted payback?
i. Should they go forward with this project? Yes or no
2. Garrett Technology 2015 Financial Statements are below:
Balance Sheet, Year ended Sept. 31, 2015
Cash $180,000 Account payable $ 360,000
Receivables 360,000 Notes payable 156,000
Inventories 720,000 Accruals 180,000
Total curr. assets 1,260,000 Total curr. liabilities 696,000
Fixed assets 1,440,000 Common stock 1,800,000
Retained earning 204,000
Total assets $2,700,000 Total liab./equity $2,700,000
Construct a 2015 income statement with sales of $3,600,000. COGS is 40% of sales, operating expenses are $1,080,000, interest expense is $18,280. Taxes 40%. Dividend payout 80%.
Now construct a 2016 proforma income statement and balance sheet using the percent of sales method with a 10% sales increase. Operating expenses are expected to increase by 3%. 80% of net income is still paid out as dividends. Interest expense is expected to stay the same. Remember-notes payable does not change until after the calculation for external funds. They are presently at 85% of fixed asset capacity.
a. 2016 sales
b. 2016 EBT
c. 2016 EAT
d. 2016 exp. dividend payout
e. 2016 exp. retained earnings
f. proforma current assets
g. proforma total assets
k. external fund requirement yes or no
l. What can sales increase to (state in $) until fixed assets need to increase?
Quick calculator (formula) work
1. The NPV for a project with estimated cash flows of $45,000 per year for 5 years, initial investment $150,000, cost of capital 9.5% is $75,000. True or false.
2. The IRR for this same project is ?
3. If my capital structure is 30% debt and 70% equity and my cost of debt is 5% (after tax) and cost of equity is 8%, my WACC is 7.1%. True or false.
4. The biggest differences in calculating the cost of equity for common stock and new issue common stock are flotation costs and undervaluation. True or false.
Part -2:
1. Current sales are $360,000, current assets $80,000, accounts payable $15,000, accruals $5,000, net profit margin of 5% with a 50% dividend payout. If I expect sales to increase by 20% and no fixed assets are needed, what is my external funds requirement? Take to 4 decimal places when calculating.
2. Current sales are $360,000, current assets $80,000, accounts payable $15,000, accruals $5,000, net profit margin of 5% with a 50% dividend payout. If I expect sales to increase by 20% and am at capacity so my fixed assets of $80,000 will also need to be increased by the 20%, now what is my external funds requirement? Take to 4 decimal places when calculating.