Chapter 13, Problem 24QAP

a

Summary Introduction

Adequate information:

Land price $\left(\text{BO}\right)$ = 7,300,000

Current land value $\left(\text{LV}\right)$ = 7,500,000

Land value in 5 years $\left({\text{LV}}_{\text{5}}\right)$ = 7,900,000

Plant and equipment cost $\left({\text{C}}_{\text{P\&E}}\right)$ = $55,000,000

Bonds outstanding $\left(\text{BO}\right)$ = 130,000

Coupon rate of Bond $\left({\text{CR}}_{\text{B}}\right)$ = 6.10%

Face value of Bond $\left({\text{FV}}_{\text{B}}\right)$ = $2,000

Selling rate of Bond $\left({\text{R}}_{\text{B}}\right)$ = 104%

Price of Bond $\left({\text{PV}}_{\text{B}}\right)$ = $2,080

Term duration of Bond $\left({\text{T}}_{\text{B}}\right)$ = 25 years

Number of compounding periods in a year $\left({\text{N}}_{\text{B}}\right)$ = 2

Common stock outstanding $\left({\text{SO}}_{\text{CS}}\right)$ = 9,900,000

Beta of the stock $\left({\text{β}}_{\text{CS}}\right)$ = 1.20

Current price per share $\left({\text{P}}_{\text{CS}}\right)$ = $68

Preferred stock outstanding $\left({\text{SO}}_{\text{PS}}\right)$ = 400,000

Current rate of preferred stock $\left({\text{CR}}_{\text{PS}}\right)$ = 4.20%

Current price per share $\left({\text{P}}_{\text{PS}}\right)$ = $87

Par value $\left({\text{FV}}_{\text{PS}}\right)$ = $100

Risk-free rate $\left({\text{R}}_{\text{f}}\right)$ = 3.10%

Market risk premium $\left({\text{R}}_{\text{M}}\right)$ = 7%

Equity flotation cost $\left({\text{f}}_{\text{e}}\right)$ = 6.50%

Preferred flotation cost $\left({\text{f}}_{\text{p}}\right)$ = 4.50%

Debt flotation cost $\left({\text{f}}_{\text{d}}\right)$ = 3%

Tax rate $\left(\text{t}\right)$ = 25%

Net working capital $\left(\text{NWC}\right)$ = $2,500,000

To compute: Initial Year 0 cash flow

Introduction: Initial outlay refers to the capital requirements of the project such as initial investment, working capital, cost of land, etc.

b

Summary Introduction

Adequate information:

Adjustment factor (Risk premium) = 2%

To compute: Appropriate discount rate

Introduction: The adjusted weighted average cost of capital (WACC) refers to the discount rate that takes into consideration the risk premium.

c

Summary Introduction

Adequate information:

Life of plant = 8 years

Life of project = 5 years

Plant salvage value $\left({\text{SV}}_{\text{P}}\right)$ = $8,900,000

To compute: After-tax salvage value

Introduction: Salvage value refers to the value of the asset after depreciation.

d

Summary Introduction

Adequate information:

Annual fixed cost = $8,100,000

Number of RDS manufactured = 18,500

Sale price per RDS = $11,600

Variable costs per RDS = $9,750

To compute: Annual operating cash flow from this project

Introduction: Annual operating cash flow (OCF) refers to the cash generated by a firm using through day-to-day business operations.

e

Summary Introduction

To compute: Accounting Break-even

Introduction: The term Accounting break-even refers to the no profit, no loss stage wherein the company has recovered the cost incurred on the project but has not made any profit till now.

f

Summary Introduction

To compute: IRR and NPV

Introduction: Net present value refers to the difference between the present value of cash inflows and the initial outlay. Internal rate of return refers to the rate which make PNV zero.