Sports EX Inc. is a Sports Shoes 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 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 a 4% return.You are required to:1. Compute the after-tax cost of debt 2. Compute the cost of common stock 3. Compute the WACC 4. Compute the initial outlay of the project 5. Calculate the annual after-tax OCF for years 1-36. Determine the terminal cash flow for year 3 7. Determine the FCF for years 1-3 8. Compute the project’s NPV9. Estimate the project’s IRR 10. Should the project be accepted?
Sports EX Inc. is a Sports Shoes 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.
You are required to:
1. Compute the after-tax cost of debt
2. Compute the cost of common stock
3. Compute the WACC
4. Compute the initial outlay of the project
5. Calculate the annual after-tax OCF for years 1-3
6. Determine the terminal cash flow for year 3
7. Determine the FCF for years 1-3
8. Compute the project’s NPV
9. Estimate the project’s
10. Should the project be accepted?
Step by step
Solved in 2 steps
