The Grail Segament (GS) produces foam model airplanes for the hobby industry. GS has managed to be debt free to date. There are 100,000 ordinary shares outstanding, with a market capitalization of $2 million. Equity holders require a return of 10 percent on their investment. GS intends to diversify by manufacturing a new line of balsa wood model airplanes. This venture will not raise the risk level of the company. The equipment to make such airplanes cost $12,000, which will be the depreciable base. GS uses straight-line depreciation for its non-current assets. The equipment is expected to last 3 years, at which time the equipment will be sold for $2,000 (after tax). The expected demand is 1,000 balsa airplanes per year. Each new airplane will be priced at $20 in the first year and thereafter rise at 5 percent per year. Total variable costs are expected to be $4 per airplane. The corporate tax is at 15 percent. Question: Please compute the value added to the company if it diversifies. What is the price per share of WSC if the new investment is undertaken? Make a reasoned recommendation on the new investment. thanks
The Grail Segament (GS) produces foam model airplanes for the hobby industry. GS has managed to be debt free to date. There are 100,000 ordinary shares outstanding, with a market capitalization of $2 million. Equity holders require a return of 10 percent on their investment. GS intends to diversify by manufacturing a new line of balsa wood model airplanes. This venture will not raise the risk level of the company. The equipment to make such airplanes cost $12,000, which will be the depreciable base. GS uses straight-line depreciation for its non-current assets. The equipment is expected to last 3 years, at which time the equipment will be sold for $2,000 (after tax). The expected demand is 1,000 balsa airplanes per year. Each new airplane will be priced at $20 in the first year and thereafter rise at 5 percent per year. Total variable costs are expected to be $4 per airplane. The corporate tax is at 15 percent. Question: Please compute the value added to the company if it diversifies. What is the price per share of WSC if the new investment is undertaken? Make a reasoned recommendation on the new investment. thanks
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Question
The Grail Segament (GS) produces foam model airplanes for the hobby industry.
GS has managed to be debt free to date. There are 100,000 ordinary shares outstanding, with a market capitalization of $2 million. Equity holders require a return of 10 percent on their investment.
GS intends to diversify by manufacturing a new line of balsa wood model airplanes. This venture will not raise the risk level of the company. The equipment to make such airplanes cost $12,000, which will be the depreciable base. GS uses straight-line depreciation for its non-current assets. The equipment is expected to last 3 years, at which time the equipment will be sold for $2,000 (after tax).
The expected demand is 1,000 balsa airplanes per year. Each new airplane will be priced at $20 in the first year and thereafter rise at 5 percent per year. Total variable costs are expected to be $4 per airplane. The corporate tax is at 15 percent.
Question:
Please compute the value added to the company if it diversifies.
What is the price per share of WSC if the new investment is undertaken? Make a reasoned recommendation on the new investment.
thanks
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