Capital Budgeting Project.., Other Engineering

Assignment: You are interested in proposing a new venture to the management of your company. Pertinent financial information is given below.

BALANCE SHEET
Cash 2,000,000 Accounts Payable and Accruals 18,000,000
Accounts Receivable 28,000,000 Notes Payable 40,000,000
Inventories 42,000,000 Long-Term Debt 60,000,000
Preferred Stock 10,000,000
Net Fixed Assets 133,000,000 Common Equity 77,000,000

Total Assets 205,000,000 Total Claims 205,000,000

• Last year’s sales were $225,000,000.

• The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $874.78.

• You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost.

• The company has 10 million shares of common stock outstanding with a currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock could be sold with flotation costs, including market pressure, of 15 percent.

• The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stock’s beta is 1.22.

• Stockholders require a risk premium of 5 percent above the return on the firms bonds.

• The firm expects to have additional retained earnings of $10 million in the coming year, and expects depreciation expenses of $35 million.

• Your firm does not use notes payable for long-term financing.

• The firm considers its current market value capital structure to be optimal, and wishes to maintain that structure. (Hint: Examine the market value of the firm’s capital structure, rather than its book value.)

• The firm is currently using its assets at capacity.

• The firm’s management requires a 2 percent adjustment to the cost of capital for risky projects.

• Your firm’s federal + state marginal tax rate is 40%.

• Your firm’s dividend payout ratio is 50 percent, and net profit margin was 8.89 percent.

• The firm has the following investment opportunities currently available in addition to the venture that you are proposing:

Project Cost IRR
A 10,000,000 20%
B 20,000,000 18%
C 15,000,000 14%
D 30,000,000 12%
E 25,000,000 10%

Your venture would consist of a new product introduction (You should label your venture as Project I, for “introduction”). You estimate that your product will have a six-year life span, and the equipment used to manufacture the project falls into the MACRS 5-year class. Your venture would require a capital investment of $15,000,000 in equipment, plus $2,000,000 in installation costs. The venture would also result in an increase in accounts receivable and inventories of $4,000,000. At the end of the six-year life span of the venture, you estimate that the equipment could be sold at a $4,000,000 salvage value.

Your venture, which management considers fairly risky, would increase fixed costs by a constant $1,000,000 per year, while the variable costs of the venture would equal 30 percent of revenues. You are projecting that revenues generated by the project would equal $5,000,000 in year 1, $10,000,000 in year 2, $14,000,000 in year 3, $16,000,000 in year 4, $12,000,000 in year 5, and $8,000,000 in year 6.

The following list of steps provides a structure that you should use in analyzing your new venture.

Note: Carry all final calculations to two decimal places.
1. Find the costs of the individual capital components (16 points):
a. long-term debt
b. preferred stock
c. retained earnings (avg. of CAPM, DCF, & bond yield + risk premium approaches)
d. new common stock
2. Compute the value of the long-term elements of the capital structure, and determine the target percentages for the optimal capital structure. Carry weights to 4 decimal plances.
3. Compute the retained earnings break point.
4. Draw the MCCF schedule, including depreciation-generated funds in the schedule.
5. Compute the Year 9 investment for Project I.
6. Compute the annual operating cash flows for years 1-6 of the project.
7.. Compute the additional non-operating cash flow at the end of year 6.
8. Draw a timeline that summarizes all of the cash flows for your venture
9. Compute the IRR and payback period for Project I
10. Draw the IOS schedule including Project I along with Projects A-F
11. Setermine your firm’s cost of capital
12. Indicate which projects should be accepted based on your MCC and IOS schedules and why?
13. Compute the NPV for Project I at the risk-adjusted cost of capital for the project. Should management adopt this project based on your analysis? Explain. Would your answer be different if the project were determined to be of average risk?
Posted Date: 5/1/2012 11:15:55 AM | Location : United States







Related Discussions:- Capital Budgeting Project.., Assignment Help, Ask Question on Capital Budgeting Project.., Get Answer, Expert's Help, Capital Budgeting Project.. Discussions

Write discussion on Capital Budgeting Project..
Your posts are moderated
Related Questions
Evolutionary Methods Optimization methods based upon natural or biological processes Need to be able to parameterise a solution and determine a cost function (good or bad

A 2-m long section of a 3-mm in diamter wire is maintained at a constant surface temperature of 370C. The wire is subject to a cross-flow of air at 30C at 6 m/s Determine the rate

original temp. of plate is 25 degree c.when put in burnace its upper part is 250 c and lower is 100 and mass is 56kg.find out heat transfer


A 10m diameter circular tunnel is to be excavated in a jointed ground.  The joint sets spaced at 6m are dipping towards the West at 50°.  A horizontal circular tunnel is to be cons


DEALER'S CERTIFICATE Reference: When the sale of an aircraft involves flight without a Certificate of Registration, The C.A.A. will permit the aircraft to fly under certain re

Q.4 Explains subtractive rapid prototyping process and compare with additive process.                                                   OR What are additive and su

Signal conditioning amplifier The primary function of the signal conditioning amplifier is to match the output signal range of the transducer to the input signal range of the a

Electronic APU fuel control System in Aircraft : Electronic fuel control emulates the mechanical system, however it provides control in a slightly different way. The electronic