Balance Sheet Cash = $3,000,000 Accounts Receivable = $24,000,000 Inventories =
ID: 2752357 • Letter: B
Question
Balance Sheet
Cash = $3,000,000
Accounts Receivable = $24,000,000
Inventories = $55,000,000
Net Fixed Assets = $173,000,000
Total Assets = $255,000,000
Accounts Payable and Accruals = $14,000,000
Notes Payable = $29,356,200
Long-Term Debt (Bonds) = $52,243,800
Preferred Stock = $9,400,000
Common Stock (Equity) = $150,000,000
Total Liabilities & Owners Equity = 255,000,000
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
NPV
IRR
A
5,000,000
15%
B
4,000,000
10%
C
3,500,000
15%
D
3,000,000
11%
E
2,000,000
8%
All projects, including Project I - are assumed to be of average risk.
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 $3,000,000. This means there is a change in NWC (cash outflow) at the start of the project. The NWC ($ 3,000,000) will be released as a cash inflow in Year 6.
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.
Need Answers for Below:
1. Find the costs of the individual capital components
a. long-term debt
b. preferred stock
c. Common Stock (Equity) (use DCF approach)
2. Determine the weighted average cost of capital.
3. Compute the Year 0 investment for Project I.
4. Compute the annual operating cash flows for years 1-6 of the project.
5. Compute the non-operating (terminal Salvage and change in NWC) cash flow at the end of year 6.
6. Draw a timeline that summarizes all of the cash flows for your venture.
7. Compute the IRR, payback, discounted payback, and NPV for Project I.
Project
NPV
IRR
A
5,000,000
15%
B
4,000,000
10%
C
3,500,000
15%
D
3,000,000
11%
E
2,000,000
8%
Explanation / Answer
Balance Sheet Cash = $3,000,000 Accounts Receivable = $24,000,000 Inventories =
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