Name problem (30 points) Problem (30 points) WACC, capital budgeting, and econom
ID: 2725246 • Letter: N
Question
Name problem (30 points) Problem (30 points) WACC, capital budgeting, and economic break-even (30 points) Your boss has given you the following project to analyze. The project involves converting an old warehouse your company owns into a new production facility. . The warehouse could be sold today for $500,000 before taxes. It currently has a book value of zero. The project would require $2,200,000 in renovations and equipment. This investment will be depreciated using the straight-line method to a salvage value of $200,000 over 5 years. At that point, after the project is complete, the warehouse and equipment could be sold for $150,000 before taxes. Be sure to calculate the tax effects, if any, of these items. The project would last for 5 years. Each year, you expect to sell 25,000 units at $70 each. Variable costs per unit are $30. Yearly fixed costs to maintain the equipment will be $50,000. . . The project will require transferring a manager who currently works for the company from another factory to the warehouse. Her yearly salary is $75,000. The project will also require hiring a new accountant at a cost of $60,000 per year. . The project would need levels of inventory of $100,000 immediately, $150,000 in one year, and $200,000 in two years. After that, inventory levels will remain constant, until they are completely recovered at cost at the end of the project. Your company's margin tax rate is 35% Your company has issued S100 million in bonds. They have a face value of S100, pay a 5% annual coupon, were issued at par, mature in 8 years, and currently trade at $880.57 . Your company has 10 million shares outstanding. They currently trade at $35.22 per share. Your company's beta is 1.5. The current risk-free rate is 3% and the expected market premium is 8%.Explanation / Answer
Bond Value in million 100 YTM=[C + (M-P)/n]/(0.4M+0.6P) where C=Coupon,M=Face Value,P=Current Price,n=Years left till maturity YTM=(50+(1000-880.57)/8)/(0.4*1000+0.6*880.57) 0.0699 or 6.99% Share Value=10m*35.22 352.2 Cost of equity=Riskfree Rate+Beta*Risk Premium=3+1.5*8 15 15% Total Value of the firm in million=100+352.2 452.2 WACC=Proportion of debt*YTM*(1-Tax Rate)+Proportion of equity*Cost of equity=(100/452.2)*6.99*(1-0.35)+(352.2/452.2)*15 12.69 Description of cashflow/Year 0 1 2 3 4 5 Renovation Cost (A) 2200000 Change in Working Capital/Inventory (B) 100000 50000 50000 0 -200000 Sale value of warehouse and renovation Value (value less than salvage value and so no taxes) (B1) 150000 Income =Quantity*(SP-VC)-FC=25000*(70-30)-50000 © 950000 950000 950000 950000 950000 Salary Expenses=75000+60000 (D) 135000 135000 135000 135000 135000 Depriciation =(2200000-200000)/5 (E) 400000 400000 400000 400000 400000 Net Income after tax=(C-D-E)*(1-0.35) (F) 269750 269750 269750 269750 269750 Cash flow=F+E+B1-A-B -2200000 569750 619750 619750 669750 1019750 Discounted cash flow @12.69% -2200000 505590.6 488029.2 433072.3 415308.9 561134.3 NPV=Sum of discounted cash flow 203135.2
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.