BALANCE SHEET Cash 2,000,000 Accounts Payable and Accruals 18,000,000 Accounts Receivable 28,000,000 Notes Payable 40,000,000 Inventories 42,000,000 Long-Term Debt 60,000,000 Preferred Stock 10,000,000 Net Fixed Assets 133,000,000 Common Equity 77,000,000 Total Assets 205,000,000 Total Claims 205,000,000 Last years sales were $225,000,000. The company has 60,000 bonds with a 30-year life outstanding, with 15 years until maturity. The bonds carry a 10 percent semi-annual coupon, and are currently selling for $874.78. You also have 100,000 shares of $100 par, 9% dividend perpetual preferred stock outstanding. The current market price is $90.00. Any new issues of preferred stock would incur a $3.00 per share flotation cost. The company has 10 million shares of common stock outstanding with a currently price of $14.00 per share. The stock exhibits a constant growth rate of 10 percent. The last dividend (D0) was $.80. New stock could be sold with flotation costs, including market pressure, of 15 percent. The risk-free rate is currently 6 percent, and the rate of return on the stock market as a whole is 14 percent. Your stocks beta is 1.22. Stockholders require a risk premium of 5 percent above the return on the firms bonds. The firm expects to have additional retained earnings of $10 million in the coming year, and expects depreciation expenses of $35 million. Your firm does not use notes payable for long-term financing. The firm considers its current market value capital structure to be optimal, and wishes to maintain that structure. (Hint: Examine the market value of the firms capital structure, rather than its book value.) The firm is currently using its assets at capacity. The firms management requires a 2 percent adjustment to the cost of capital for risky projects. Your firms federal + state marginal tax rate is 40%. Your firms dividend payout ratio is 50 percent, and net profit margin was 8.89 percent. The firm has the following investment opportunities currently available in addition to the venture that you are proposing: Project Cost IRR A 10,000,000 20% B 20,000,000 18% C 15,000,000 14% D 30,000,000 12% Your venture would consist of a new product introduction (You should label your venture as Project I, for introduction). You estimate that your product will have a six-year life span, and the equipment used to manufacture the project falls into the MACRS 5-year class. Your venture would require a capital investment of $15,000,000 in equipment, plus $2,000,000 in installation costs. The venture would also result in an increase in accounts receivable and inventories of $4,000,000. At the end of the six-year life span of the venture, you estimate that the equipment could be sold at a $4,000,000 salvage value. Your venture, which management considers fairly risky, would increase fixed costs by a constant $1,000,000 per year, while the variable costs of the venture would equal 30 percent of revenues. You are projecting that revenues generated by the project would equal $5,000,000 in year 1, $10,000,000 in year 2, $14,000,000 in year 3, $16,000,000 in year 4, $12,000,000 in year 5, and $8,000,000 in year 6. Compute the annual operating cash flows for years 1-6 of the project