Bundle: Financial Management: Theory and Practice, Loose-leaf Version, 15th + Aplia, 1 term Printed Access Card
Bundle: Financial Management: Theory and Practice, Loose-leaf Version, 15th + Aplia, 1 term Printed Access Card
15th Edition
ISBN: 9781337130295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
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Chapter 11, Problem 4MC
Summary Introduction

Case summary:

Company S desires to add a new line to its product mix. For this purpose the analysis of capital budgeting was conducted by person S an MBA graduate. The invoice price of the machinery is $200,000 approximately and $10,000 shipping charges are required. Installation charges are $30,000. The machinery has a 4 years’ life with a salvage value of $25000.

The new line leads to increase the sales of 1,250 units each year of 4 years and cost of $100 per unit in first year. The units are sold for $200 in the 1st year.

It results to an increase in company’s net working capital by 12% value of sales. Company’s tax rate is 40% and risk adjusted cost of capital or weighted average cost of capital for an average project is 10%.

Characters in the case:

  • Company S
  • Person S

To compute: The annual incremental operating cash flow statements.

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Need the below table filled out for Short-term debt %, Long-term debt $,%, Common equity $,% and Total capital $,%. Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet:   Current assets   $30,000,000   Current liabilities   $20,000,000         Notes payable   10,000,000 Fixed assets   70,000,000   Long-term debt   30,000,000         Common stock (1 million shares)   1,000,000         Retained earnings   39,000,000 Total assets   $100,000,000   Total liabilities and equity   $100,000,000 The notes payable are to banks, and the interest rate on this debt is 11%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the company's permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of $1,000, an annual coupon interest rate of 6%, and a 15-year maturity. The going rate of interest on new long-term debt, rd, is 12%, and this is the…
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