(KHC) is considering an investment project that requires a new machine for $2,45
ID: 2726009 • Letter: #
Question
(KHC) is considering an investment project that requires a new machine for $2,450,000. This new machine will be depreciated over 10 years on a straight-line basis toward a zero salvage value. KHC paid a consulting company $50,000 last year to help them decide whether there is sufficient demand for the machine’s products. In addition to the investment on the machine, KHC also invests $20,000 in net working capital but decides NOT to recoup the net working capital at the end of the investment project. KHC has estimated the performance of the new machine and believes that the new machine will produce $850,000 per year in sales, $300,000 per year in cost of goods sold, and $100,000 per year in administrative expenses. In order to get an estimate of cost of capital, KHC collects the following information. KHC expects to pay $2.1 of dividend next year. An estimated growth rate is 4%. The stock is currently selling for $35. The beta of KHC stock is 1.2. Debt similar to KHC’s is selling in the bond market at a price of $8,463. The bonds have 8% annual coupon rate, coupon paid semi-annually, 15 years to maturity and face value of $10,000. The risk free rate is 5% and the expected return on the market is 12.5%. KHC has a corporate tax rate of 30%. Currently KHC has the capital structure with 40% of debt and 60% of equity.
How much money does KHC need to spend to start the investment project (i.e., project cash flow at time 0)?
$2,500,000
$30,000
$2,530,000
$2,470,000
2 points
QUESTION 22
What is the annual project cash flow expected to be generated by the investment project?
$600,000
$140,000
$390,000
$850,000
2 points
QUESTION 23
What is the after-tax cost of debt for KHC?
7%
9%
8%
10%
2 points
QUESTION 24
What is the cost of equity for KHC by using the dividend growth model?
14%
10%
12%
11%
2 points
QUESTION 25
What is the cost of equity for KHC by using the capital asset pricing model?
14%
10%
12%
20%
2 points
QUESTION 26
What is the weighted average cost of capital for KHC?
11%
12%
10%
14%
2 points
QUESTION 27
What is the payback period for the investment project?
6.49 years
17.26 years
18.57 years
6.33 years
2 points
QUESTION 28
What is the net present value for the investment project?
$133,618.83
-$133,618.83
-$73,618.83
$73,618.83
2 points
QUESTION 29
What is the internal rate of return for the investment project?
9.30%
11.29%
8.76%
10.68%
2 points
QUESTION 30
What is the profitability index for the project?
1.95
-0.97
0.97
0.95
2 points
QUESTION 31
Should KHC accept the project?
Yes because the payback period is longer than the project life.
No because the net present value is negative.
Yes because the internal rate of return is lower than the cost of capital.
No because the profitability index is negative.
2 points
QUESTION 32
What is the maximum price that KHC has to pay if the target profitability index is 1.1?
$2,500,000.00
$2,178,528.34
$2,088,000.44
$2,282,267.78
2 points
QUESTION 33
What is the minimum annual cash flow that project has to generate in order to accept the project?
$402,514.67
$411,745.85
$409,418.72
$401,981.13
2 points
QUESTION 34
If KHC's target weighted average cost of capital is 9%, what is the firm's target debt-equity ratio?
0.67
1.5
1.25
0.5
a.$2,500,000
b.$30,000
c.$2,530,000
d.$2,470,000
Explanation / Answer
question 21 d $2,470,000
question 22 c $388,500
revenue 850,000
cost of good sold ( 300,000)
Adm exp (100,000)
Dep (245,000)
PBT 205,000
Tax (61,500)
PAT 143,500
Dep 245,000
CFAT 3,88,500
Q 23 a 7%( app)
Q24 b 10%
Ke =(2.1/35)+.04
Q25 a 14%
Ke =.05+1.2(.125-.05)
Q26 a 11%
Ko=.4*.07+.6*.14
Q.27 d 6.33
Pay back period =2,470,000/388,500
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