Finance Project, Other Engineering

Assignment Help:
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%.

• 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 four decimal places. For example: 0.2973 or 29.73%) (5 points)
3. Compute the retained earnings break point. (5 points)
4. Draw the MCC schedule, including depreciation-generated funds in the schedule. (10 points)
5. Compute the Year 0 investment for Project I. (5 points)
6. Compute the annual operating cash flows for years 1-6 of the project. (12 points)
7. Compute the additional non-operating cash flow at the end of year 6. (6 points)
8. Draw a timeline that summarizes all of the cash flows for your venture. (5 points)
9. Compute the IRR and payback period for Project I. (8 points)
10. Draw the IOS schedule, including Project I along with Projects A-E. (5 points)
11. Determine your firm’s cost of capital. (5 points)
12. Indicate which projects should be accepted based on your MCC and IOS schedules, and why. (5 points)
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? Explain. (8 points)
14. Conclude the project with your reflections on what you have learned from this course and how it has affected your view of your own job and career (5 points).
.

Related Discussions:- Finance Project

Summing amplifier, Summing amplifier: As the title implies, this is an ...

Summing amplifier: As the title implies, this is an adding device.  The circuit can take any number of voltage inputs, and the output voltage is simply the sum of these inputs.

Limitations of the powder metallurgy process, Q. What are the limitations o...

Q. What are the limitations of the powder metallurgy process ? How are some of these overcome ? Ans. Limitations : 1. Dies and equipment costs are high. So, the process

Programming, A charitable organization wants to design a special ATM machin...

A charitable organization wants to design a special ATM machine to be used by needy people. The association supplies the needy person with a pin number to be able to use the ATM

Guidance laws , The guidance law is used to generate a requirement (usually...

The guidance law is used to generate a requirement (usually an required acceleration) that will achieve the guidance objective. In this course, we will look at three main types

Signal and system, if the response of a signal is h(t) then the cascading o...

if the response of a signal is h(t) then the cascading of two responses h1(t) and h2(t) is given by

Aircraft Propulsion, An aircraft is flying at a speed of 500 ft/s an altitu...

An aircraft is flying at a speed of 500 ft/s an altitude of 20,000 ft, where the atmospheric temperature and pressure are 447.3°R and 972.5 lbf/ft2, respectively. If the inlet / di

3d sketch , I am a chemical engineering foundation year. I need your help ...

I am a chemical engineering foundation year. I need your help with my homework, its 3D sketch by using Google sketchup program?? I have not use it before. Or any other 3D sketch p

Robotics, how to become robotics engneer

how to become robotics engneer

Find the standard deviation of this portfolio''s returns, Suppose you have ...

Suppose you have $50,000 that you want to invest in two companies, Bethlehem Books and Allentown Audio. Bethlehem has a return of 10% and standard deviation 15%, while Allentown ha

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd