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Amber Technologies Inc. is considering to introduce a new technological product that has been proposed by the company's information technology group. Before proceeding with
Amber Technologies Inc. is considering to introduce a new technological product that has been proposed by the company's information technology group. Before proceeding with the proposal, the company must evaluate the financial feasibility of the project. Assume that, you have been hired as a Financial Manager of this project and will be assisting the Chief Financial Officer (CFO) of this corporation. Your CFO has provided you with the following data, which he believes will be necessary to your tasks: This new product will have 3-year lives, as the company is planning to introduce entirely new models after 3 years. This project will be costing BDT 9,710,000 and is expected to generate operating income of BDT 4,750,000 per year. This project will also produce $200,000 of depreciation per year. Assume the company's tax rate is 40%. This project will not require any working capital at all. As a financial manager of this corporation, and the concepts you have learned from your FIN421 class, you are well aware that, you need a discount rate to evaluate this project and you identified that the firm's marginal Weighted Average Cost of Capital (WACC) is the appropriate discount rate to evaluate this particular project. But, its WACC is not yet calculated. You came to know that, to finance this project Amber Technologies will issue 6,000 bonds with 6.5% coupon, BDT 1000 par value and 5-years maturity period. These bonds will be selling for 92% of par, with semi-annual coupon payments. The cost of issuing and selling the bond is expected to be BDT 20 per bond. This issuance of bonds will result an annual interest expense of BDT 5,20,000 for the company. In addition to that, the firm will sell 18,000, 10% (annual dividend) preferred stock (BDT 70 Par Value) at a price of BDT 90 per share (with premium). The cost of issuing and selling the preferred stock is expected to be BDT 2.5 per share. Remaining balance of the required amount will be funded by the company's internal equity. At present, the corporation has total twelve thousand (12,000) common shares outstanding which is currently selling at BDT 50 per share in the stock market. The firm paid a BDT 3.00 dividend last year and expects dividends to continue growing at a constant rate of 10% per year. The cost of issuing and selling each common stock is generally BDT 2.00 per share for the firm. -2- The CFO of the company is already overwhelmed with enormous workload and hence asked for your favor in the following critical calculations seeing your competencies in the area of corporate finance. 2. Estimate the applicable WACC for the project along with its interpretation.
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