1: WEIGHTED AVERAGE COST OF CAPITAL (55 Marks) Bethesda Enterprises is a large, publicly listed company and is the market leader in manufacturing dehumidifiers. The company is looking to set up a manufacturing plant to produce a new line of residential dehumidifiers. This will be a six-year project. The company bought a piece of land four years ago for $8 million in anticipation of using it for its proposed manufacturing plant. If the company sold the land today, it would receive $ 10.25 million after taxes. The land can be sold for $12.5 million after taxes and reclamation costs in six years. The company is planning to build the new manufacturing plant on this land. The Plant will cost $225 million to build, and the company is expecting the payback period to be four years. The following market data on Bethesda's securities are current: Debt Equity Non-redeemable Preference shares Additional Information: $120,000,000,4.25% coupon bonds outstanding with 20 years to maturity redeemable at par, selling for 95 per cent of par; the bonds have a $1000 par value each and make semi-annual coupon payments 15,000,000ordinary shares, selling for $55 per share 12,000,000 shares (par value $ 10 per share) with 3.5% dividends (after taxes), selling for $32 per share Bethesda Enterprises' tax rate is 28%. To become operational, the project requires $ 9.5 million in initial net working capital in year 0. The company had been paying dividends to its ordinary shareholders consistently. Dividend information for the past five years is as follows: Year (-4) (5) 4.6 Year (-3) (5) 4.8 Year (-2) (5) 5.2 Year (-1) (5) 5.3 Year (0) (S) 5.9 The manufacturing plant has a ten-year tax life, and the company uses the Diminishing value method of depreciation at 25% per annum. At the end of Year 6, the Plant can be scrapped for $ 62 million. The company estimations show that 245,000 dehumidifiers are manufactured and sold per year (Years 1-6), and the selling price per unit in year one is $2,100, but the price will increase by 2% per year. Similarly, the variable costs per unit are expected to be $920 in year one, and the costs will increase by 2.5% per year in the subsequent periods. The project will incur $220 million per annum in fixed costs (fixed costs include coupon payments to bondholders). The company will sell the land at the end of year 6 Required: 1. Calculate the project's initial (time 0) cash flows (4 MARKS) 2. Compute the weighted average cost of capital (WACC) of Bethesda Enterprises. Show all workings and state the assumptions underlying your computations. (16 MARKS) 3. Make a recommendation about whether Bethesda Enterprises should go ahead with this project Justify your recommendation by explaining why or why not. (35 MARKS) Note: To make a recommendation use the following methods. The WACC calculated in part 2 should be used as your discount rate where relevant. a) Net Present Value (NPV), b) Internal Rate of Return (IRR) c) Profitability Index (PI), d) Payback period, and e) Discounted payback period Note: Work all solutions to the nearest two decimals, show the depreciation table, calculate gain/loss on the sole of Plant and Land. Record tax effects in the income statement. Page 2 of 3