The Mann Corporation is a small manufacturer of office products. Until recently, the company was all equity-financed
Question:
The Mann Corporation is a small manufacturer of office products. Until recently, the company was all equity-financed (shareholders’ equity totaled \($20\) million), having a cost of equity of twelve percent. The company decided to expand its productive capacity by investing in new plant and equipment at a cost of \($12\) million. Executives at Mann decided to finance the capital investment with lower-costing debt financing that carried an interest rate of only eight percent. The CEO of The Mann Corporation wondered what the company was now worth following the plant expansion; consequently, the CEO instructed the company’s CFO to prepare a forecast of the firm’s free cash flows. The CFO’s forecast was as follows:
Required
1. Calculate the value of The Mann Corporation.
2. Is the company’s decision to invest in new plant and equipment a good operating decision? Why?
Step by Step Answer:
Financial Accounting For Executives And MBAs
ISBN: 9781618531988
4th Edition
Authors: Wallace, Simko, Ferris