16-1A. (Analysis ofrecessionary cash flows) The management of Transpacific Inc. is considering an increase in its use of financial leverage to develop several investment projects. The proposal is to sell $15 million of bonds that would mature in 30 years. The interest rate on these bonds would be 18 percent. The bond issue would have a sinking fund attached to it requiring that one·

thirtieth of the principal be retired each year. Most business economists are forecasting a reces·

sion that will affect the economy in the coming year. Transpacific's management has been main·

taining an operating cash balance of $2 million. Cash collections from sales next year are estimated to be $4.5 million. Miscellaneous cash receipts will be $450,000. Raw material pay'

ments will be $900,000. Wage and salary cost will total $1.7 million on a cash basis. On top of this, Transpacific will experience nondiscretionary cash outflows of $1.4 million including all ta.~

payments. The firm uses a 50 percent tax rate.

a. At present, Transpacific is unlevered. What will be the total fixed financial charges the firm must pay next year?

b. If the bonds are issued, what is your forecast for the firm's expected cash balance at the end of the recessionary year (next year)?

c. As Transpacific's financial consultant, do you recommend that it issue the bonds?