A five year project will require an investment of $100 million. This comprises of plant and machinery worth $80 million and a net working capital of of $20 million. The entire outlay will be incurred at the project's commencement .
Financing for the project has been arranged as follows:
80000 new common shares are issued , The market price of which is $500 per share.These share will offer a dividend of $4 per share in year 1 , which is expected to grow at a rate of 9% per year for an indefinite tenure.
Remaning funds are borrowed by issuing 5-year, 9%semi-annual bonds , each bond having a face value of $1000. These bonds have a market value of $1150 each.
At the end of 5 years , fixed assets will fetch a net salvage value of $30 million, whereas the net working capital will be liquidated at its book value.
The project is expected to increase revenue of the firm by $120 million per year. Expenses other than depreciation , interest and tax , will amount to $80 million per year. The firm is subject to a tax rate of 30% .
Plant and machinery will be be
1. compute the
2. compute the relevant cost of debt for this project .
3. compute the WACC
4. determine the initial cash flow for the project
5. determine the earnings before taxes for years 1 through 5
6. compute the OCF for years 1 through 5
7 compute the terminal cash flow.
8. compute the FCF for years 1 through 5
9. compute the project's
10. should the project be accepted or rejected ?
![](/static/compass_v2/shared-icons/check-mark.png)
Step by step
Solved in 7 steps with 4 images
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Essentials Of Investments](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9781260013924/9781260013924_smallCoverImage.jpg)
![FUNDAMENTALS OF CORPORATE FINANCE](https://www.bartleby.com/isbn_cover_images/9781260013962/9781260013962_smallCoverImage.gif)
![Financial Management: Theory & Practice](https://www.bartleby.com/isbn_cover_images/9781337909730/9781337909730_smallCoverImage.gif)
![Foundations Of Finance](https://www.bartleby.com/isbn_cover_images/9780134897264/9780134897264_smallCoverImage.gif)
![Fundamentals of Financial Management (MindTap Cou…](https://www.bartleby.com/isbn_cover_images/9781337395250/9781337395250_smallCoverImage.gif)
![Corporate Finance (The Mcgraw-hill/Irwin Series i…](https://www.bartleby.com/isbn_cover_images/9780077861759/9780077861759_smallCoverImage.gif)