EX Inc. is a Sports Company which is considering investingin a new equipment for the production of a new line of Tennis andFootball Shoes for its elite customers. The new equipment will cost$250,000, and an additional $80,000 is needed for installation. Theequipment which falls into the MACRS 3-yr class, would be sold afterthree years for $35,000.The equipment will generate additional annual revenues of $210,000,and will have annual operating expenses of $60,000. An inventoryinvestment of $60,000 is required during the life of the project.Sports EX is in the 30 percent tax bracket, and has the same risk asthe firm’s existing assets.The capital required for the project has been arranged as follows:Debt: 1,000 8%, 10-year, semi-annual coupon bonds with a par value of$100, each selling for 90% of its face valueCommon stock: 2,500 shares selling for $96 each with a beta of 1.05.The market’s rate of return is 11% and risk-free investments offer a4% return.Compute the after-tax cost of debt and the cost of common stock.Compute the WACC and the initial outlay of the project .Calculate the annual after-tax OCF for years 1-3
EX Inc. is a Sports Company which is considering investing
in a new equipment for the production of a new line of Tennis and
Football Shoes for its elite customers. The new equipment will cost
$250,000, and an additional $80,000 is needed for installation. The
equipment which falls into the MACRS 3-yr class, would be sold after
three years for $35,000.
The equipment will generate additional annual revenues of $210,000,
and will have annual operating expenses of $60,000. An inventory
investment of $60,000 is required during the life of the project.
Sports EX is in the 30 percent tax bracket, and has the same risk as
the firm’s existing assets.
The capital required for the project has been arranged as follows:
Debt: 1,000 8%, 10-year, semi-annual coupon bonds with a par value of
$100, each selling for 90% of its face value
Common stock: 2,500 shares selling for $96 each with a beta of 1.05.
The market’s
4% return.Compute the after-tax cost of debt and the cost of common stock.
Compute the WACC and the initial outlay of the project .Calculate the annual after-tax OCF for years 1-3
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