Reference no: EM131915236
Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. If the land were sold today, the net proceeds would be $7.65 million after taxes. In five years, the land will be worth $7.95 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.2 million to build. The following market data on DEI’s securities are current: Debt: 45,500 6.8 percent coupon bonds outstanding, 20 years to maturity, selling for 94.5 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 755,000 shares outstanding, selling for $94.50 per share; the beta is 1.25. Preferred stock: 35,500 shares of 6.2 percent preferred stock outstanding, selling for $92.50 per share. Market: 7 percent expected market risk premium; 5.2 percent risk-free rate. DEI’s tax rate is 35 percent. The project requires $850,000 in initial net working capital investment to get operational. a. Calculate the project’s Time 0 cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Time 0 cash flow $ b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of +1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI’s project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Discount rate % c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (i.e., the end of Year 5), the plant can be scrapped for $1.55 million. What is the aftertax salvage value of this manufacturing plant? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Aftertax salvage value $ d. The company will incur $2,350,000 in annual fixed costs. The plan is to manufacture 13,500 RDSs per year and sell them at $10,900 per machine; the variable production costs are $10,100 per RDS. What is the annual operating cash flow, OCF, from this project? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) Operating cash flow $ e. Calculate the project's net present value. (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Net present value $ Calculate the project's internal rate of return. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Internal rate of return.
Prepare journal entries for the given transactions
: Assuming that the James Company uses a perpetual inventory system, prepare journal entries for the above transactions
|
What is the gain or loss in the futures market
: Did the basis strengthen or weaken? Explain. What is the gain or loss in the futures market? Show your work.
|
What form of ethical reasoning did autry seem to employ
: Fifty-year-old Wesley Autry, waiting with his two young daughters in January 2007 at a New York City subway station, saw a man collapse and fall off the passeng
|
Two stocks to be correctly priced relative to each other
: What would the risk-free rate have to be for the two stocks to be correctly priced relative to each other?
|
What is the annual operating cash flow-ocf-from project
: Calculate the project's internal rate of return. What is the annual operating cash flow, OCF, from this project?
|
Discuss the century-old policy
: Toyota has tried to continue its half-century-old policy of not laying off permanent employees. When Toyota halted production in some of its U.S. plants.
|
Give a general explanation of why the p or e changed
: Compute earnings per share and the P/E ratio for 2013.Compute earnings per share and the P/E ratio for 2014.
|
What scientific advancements will be made in the study
: What scientific advancements will be made in the study of gender as the field becomes less patriarchal, and as a healthy combination of reductionism forms.
|
What is the quick ratio
: The Dry Dock has inventory of $431,700, accounts payable of S94.200, cash of S51.950, and accounts receivable of $103,680. What is the cash ratio?
|