Reference no: EM131749

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

Balance Sheet Data

Cash	3,000,000	Accounts Payable and Accruals	14,000,000
Accounts Receivable	24,000,000	Notes Payable	41,000,000
Inventories	45,000,000	Long-Term Debt	50,000,000
		Preferred Stock	20,000,000
Net Fixed Assets	128,000,000	Common Equity	75,000,000
Total Assets	200,000,000	Total Liabilities & Owners' Equity	200,000,000

Last year's sales were $210,000,000.

The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 9 percent semi-annual coupon, and are currently selling for $870.73.

You also have 100,000 shares of perpetual preferred stock outstanding, which pays a dividend of $7.80 per share. The current market price is $94.00.

The company has 10 million shares of common stock outstanding with a current price of $15.00 per share. The stock exhibits a constant growth rate of 8 percent. The last dividend (D0) was $.90.

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

The firm's target capital structure is 25% debt, 5% preferred stock, and 70% common equity. The firm does not plan to issue new common stock.

Your firm's federal + state marginal tax rate is 38%.

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

Project	Cost	IRR
A	17,000,000	21%
B	21,000,000	19%
C	16,000,000	15%
D	28,000,000	11%
E	25,000,000	8%

All projects, including Project I, are assumed to be of average risk. 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. The resulting MACRS depreciation percentages for years 1 through 6, respectively, are 20%, 32%, 19%, 12%, 11%, and 6%. Your venture would require a capital investment of $17,000,000 in equipment, plus $1,000,000 in installation costs. The venture would also result in an increase in accounts receivable and inventories of $3,000,000. At the end of the six-year life span of the venture, you estimate that the equipment could be sold at a $5,000,000 salvage value. Your venture would incur fixed costs of $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 $6,000,000 in year 1, $14,000,000 in year 2, $15,000,000 in year 3, $16,000,000 in year 4, $11,000,000 in year 5, and $8,000,000 in year 6.