Question DetailsNormal
\$ 15.00
You are the financial manager for a company in defense industry - Scored 100%
Question posted by

You are the financial manager for a company in defense industry. The firm is planning on establishing a plant overseas to produce a new line of products. The project will last for 5 years. The company bought land 6 years ago for 4 million dollars. The fair market value of the land today is 5.1 million dollars. The after tax value of the land after 5 years is \$6 million, but the company is not planning to sell then. They will keep it for a future project. The cost of the plant and equipment is \$35 million.

Currently, the firm has the following securities:
1. Debt: 240,000 bonds with 7.5% coupon rate outstanding, 20 years maturity, sold at 94% of par, the par value is \$1,000 and make semiannual payments.
2. Common Stocks: 9,000,000 stocks, selling for \$71/stock, with beta 1.2
3. Preferred stocks: 400,000 stocks at 5.5% and currently selling for \$81
The market risk premium is 8% and 5% is the risk-free rate. Tax rate is 35% and the project requires \$1,300,000 of initial net working capital.
a. Calculate the project initial cash flow CF0
b. The new project is somewhat riskier than a typical project for the firm, since it is overseas. So you are going to use a +3 adjustment factor to account for this increase risk. Calculate the appropriate discount rate that the firm should use when evaluating the project.

c. The firm will incur \$7 million in fixed cost annually. They will produce 18,000 unites annually and sell each for \$10,900. The variable cost is 9,400/unit. What is the annual OCF from this project?
d. What is the project NPV and IRR?

Available Solution
\$ 15.00
You are the financial manager for a company in defense industry - Scored 100%
• This Solution has been Purchased 1 time
• Submitted On 20 Jan, 2015 08:56:20
Solution posted by
Calculating the initial cost                        Cost of equipment    35000000        Initial working capital    1300000        Initial cost    36300000                    Note: The cost of land will not be included in the initial cost as it is a sunk cost                        Calculating the discount rate     &nb...
Buy now to view full solution.
Attachment

\$ 629.35