Reference no: EM132673599

The company is looking to set up a manufacturing plant overseas to produce a new line of residential dehumidifiers. This will be a six-year project. The company bought a piece of land four years ago for $ 8 million in anticipation of using it for its proposed manufacturing plant. If the company sold the land today, it would receive $ 10.25 million after taxes. In six years, the land can be sold for $11.5 million after taxes and reclamation costs. The company wants to build a new manufacturing plant on this land. The Plant will cost $295 million to build.

The following market data on company's securities are current:

Debt $100,000,000,6.25% coupon bonds outstanding with 20 years to maturity redeemable at par, selling for 95 percent of par; the bonds have a $1000 par value each and make semi-annual coupon payments.

• Equity 15,000,000ordinary shares, selling for $55 per share

Non-redeemable Preference shares 12,000,000 shares (par value $ 10 per share) with 6.5% dividends (after taxes), selling for $32 per share: The companies ' tax rate is 28%. The project requires $ 8.5 million in initial net working capital in year 0 to become operational. The company had been paying dividends to its ordinary shareholders consistently.

Dividend information for the past five years is as follows:

Year (-4) ($) =4.6

Year (-3) ($)=4.8

Year (-2) ($) =5.2

Year (-1) ($) =5.3

Year (0) ($) =5.9

• The manufacturing plant has a ten-year tax life, and the company uses a Diminishing value method of depreciation at 20% per annum for the Plant. At the end of Year 6, the Plant can be scrapped for $ 52 million. The company estimates show that 280,000 dehumidifiers are manufactured and sold per year (Years 1-6) and selling price per unit in year one is $2,100, but the price will increase by 2% per year. Similarly, the variable costs per unit are expected to be $800 for year one but will increase by 2.5% per year in the subsequent periods. The project will incur $320 million per annum in fixed costs (fixed costs includes coupon payments to bondholders). At the end of year 6, the company will sell the land.

Problem 1: calculate weighted Average cost of capital (WACC) with workings and stating assumptions underlying computations.