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c) Some of the managers were surprised that the project would require so much financing given the budget has shown it to be very profitable from the first month. Discuss the reasons why the new product will require so much investment, and the steps that were needed to identify the finance required.

c) Some of the managers were surprised that the project would require so much financing given the budget has shown it to be very profitable from the first month. Discuss the reasons why the new product will require so much investment, and the steps that were needed to identify the finance required.

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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c) Some of the managers were surprised that the project would require so much financing given the budget has shown it to be very profitable from the first month. Discuss the reasons why the new product will require so much investment, and the steps that were needed to identify the finance required.
Transcribed Image Text:c) Some of the managers were surprised that the project would require so much financing given the budget has shown it to be very profitable from the first month. Discuss the reasons why the new product will require so much investment, and the steps that were needed to identify the finance required.
Question 3 - Financing and Budgeting (LO3) Sussex Plc is planning a new product which will be sold to trade customers on 60 day credit terms. All investment and manufacturing costs will need to be paid either in the month of purchase or the month after. The project has been appraised by discounting future cash flows at a rate equal to the weighted average cost of capital (WACC). Budgets for the new product have determined that they need to raise long term finance of £50m, and short term finance of £10m. Short term finance needs will be met using existing bank overdraft facilities. The long term finance will be raised entirely by the issue of new long-term debt. Sussex Plc has historically financed its activities with 50% debt and 50% equity. Current market data suggest that these sources of finance have the following costs: Cost of equity 11% Cost of debt 4% Note: Assume Corporation Tax rate to be charged at 25% Required:
Transcribed Image Text:Question 3 - Financing and Budgeting (LO3) Sussex Plc is planning a new product which will be sold to trade customers on 60 day credit terms. All investment and manufacturing costs will need to be paid either in the month of purchase or the month after. The project has been appraised by discounting future cash flows at a rate equal to the weighted average cost of capital (WACC). Budgets for the new product have determined that they need to raise long term finance of £50m, and short term finance of £10m. Short term finance needs will be met using existing bank overdraft facilities. The long term finance will be raised entirely by the issue of new long-term debt. Sussex Plc has historically financed its activities with 50% debt and 50% equity. Current market data suggest that these sources of finance have the following costs: Cost of equity 11% Cost of debt 4% Note: Assume Corporation Tax rate to be charged at 25% Required:
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