Customer Service Chat
Get quote & make Payment
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.
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
Ask an Expert
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
Write your message here..
sweep effects, In the previous discussion, we investigated the static aero...
In the previous discussion, we investigated the static aeroelastic behaviour of straight (unswept) wings. These wings are characterised by an effective decoupling of wing bending a
Timber, micro structure of exogenous tree
micro structure of exogenous tree
Limiting travel distances - means of escape, Limiting travel distances - Me...
Limiting travel distances - Means of Escape: Some buildings, or parts of buildings, do not have alternative exits and do not have protected escape routes leading to a place of
Geology, write and explain the different geophysical methods
write and explain the different geophysical methods
MULTIPLE ACTIVITY CHART, WHAT ARE ADVANTAGES OF THE MULTIPLE ACTIVITY CHAR...
WHAT ARE ADVANTAGES OF THE MULTIPLE ACTIVITY CHART?
How does or gate work, Expertsmind.com brings you unique solution in Elec...
Expertsmind.com brings you unique solution in Electrical Engineering How does OR gate work? An 'OR' gate is like two or more switches positioned in parallel.
Laws of chemical combination, FeCl+NaOH
Operations research, At a machine tool plant, five jobs must be completed e...
At a machine tool plant, five jobs must be completed each day. The time it takes to do each job depends on the machine used to do the job. If a machine is used at all, there is a s
Define Thermal equilibrium, Thermal equilibrium The definition and measurem...
Thermal equilibrium The definition and measurement of temperature must be logically preceded by the concept of thermal equilibrium and the Zeroth law. To determine operationally wh
Binary cycle, Consider the binary cycle using the sodium and steam/water in...
Consider the binary cycle using the sodium and steam/water in the sketch below and operating at conditions in Table 1. Draw T S Diagram and find the thermal cycle efficiency
Accounting Assignment Help
Economics Assignment Help
Finance Assignment Help
Statistics Assignment Help
Physics Assignment Help
Chemistry Assignment Help
Math Assignment Help
Biology Assignment Help
English Assignment Help
Management Assignment Help
Engineering Assignment Help
Programming Assignment Help
Computer Science Assignment Help
Why Us ?
~24x7 hrs Support
~Quality of Work
~Time on Delivery
~Privacy of Work
Human Resource Management
Literature Review Writing Help
Terms & Conditions
Copyright by ExpertsMind IT Educational Pvt. Ltd.