Case 15 Where Do We Draw The Line? 71 Table 7 Other Relevant Information Regarding ProChem's Capital Components Treasury Bond Yield = 4% Equity Beta 1.45 Risk Premium over Bond Yield = 6% Market Risk Premium 9% Current Bond Price $925 Remaining Maturity on Bonds = 19 years Corporate Tax Rate = 38% Current Stock Price = $18 Flotation Costs: Debt: 5% of Selling Price Equity: 0-$50 million = 10% of Selling Price 50M - 200M = 15% of Selling Price Case 15 Where Do We Draw The Line? 70 Table 6 13,761 Cash and Cash Equivalents Short-Term Investments Accounts Receivable, Net Inventories 35,058 ProChem Pharmaceuticals Balance Sheet ('000s) 182,382 Accounts Payable 94,557 Accrued Liabilities 56,951 Deferred Revenue 78,894 Deferred Income Taxes 14,283 Short-Term Debt 5,666 Current Maturities of Long- Term Obligations 432,733 Total Current Liabilities 13277 Deferred Income Taxes 2.447 5.581 Other Current Assets 263 Total Current Assets 70,387 Property and Equipment, Net Deferred Income Taxes 11,605 125.000 Goodwill Intangible Assets, Net Other Assets 21,474 13,978 6,278 Long-Term Debt (125,000 Bonds Outstanding, 12% Coupon 20-Year Original Maturity) Common Stock, $0.001 Par Value, 60,000,000 Shares Authorized: (17,782,000 Shares Outstanding) Additional Pald-in Capital Retained Earnings Total Shareholder's Equity 18 173,968 116,695 290,681 Total Assets 486,068 Total Liabilities and Shareholders' Equity 486,068 Draw The Line? 69 Table 5 ProChem Pharmaceuticals Income Statement ('000s) Total Revenues Total Cost of Revenues Gross Profit Total Operating Expenses Income (loss) from Operations Interest Expense Interest and Other Income, Net Income (loss) Before Income Taxes Provision (benefit) for Income Taxes Net Income Dividends Paid Dividends Per Share 416,497 243,981 172,516 75,855 96,661 (1,693) 3,903 98,871 34,605 64,266 30,848 1.73 10. Based upon your results, where should Cecil draw the line when it comes to deciding between the four product acquisi- 7. Develop an investment opportunity schedule (IOS) for ProChem. 8. How many break points will the firm's marginal cost of capital schedule (MCC schedule) have? Why? 9. Develop the firm's MCC schedule. Note: For the cost of new equity, use the average cost of retained earnings duly adjusted for flotation costs. tions? Why? Case 15 Where Do We Draw The Line? 71 Table 7 Other Relevant Information Regarding ProChem's Capital Components Treasury Bond Yield = 4% Equity Beta 1.45 Risk Premium over Bond Yield = 6% Market Risk Premium 9% Current Bond Price $925 Remaining Maturity on Bonds = 19 years Corporate Tax Rate = 38% Current Stock Price = $18 Flotation Costs: Debt: 5% of Selling Price Equity: 0-$50 million = 10% of Selling Price 50M - 200M = 15% of Selling Price Case 15 Where Do We Draw The Line? 70 Table 6 13,761 Cash and Cash Equivalents Short-Term Investments Accounts Receivable, Net Inventories 35,058 ProChem Pharmaceuticals Balance Sheet ('000s) 182,382 Accounts Payable 94,557 Accrued Liabilities 56,951 Deferred Revenue 78,894 Deferred Income Taxes 14,283 Short-Term Debt 5,666 Current Maturities of Long- Term Obligations 432,733 Total Current Liabilities 13277 Deferred Income Taxes 2.447 5.581 Other Current Assets 263 Total Current Assets 70,387 Property and Equipment, Net Deferred Income Taxes 11,605 125.000 Goodwill Intangible Assets, Net Other Assets 21,474 13,978 6,278 Long-Term Debt (125,000 Bonds Outstanding, 12% Coupon 20-Year Original Maturity) Common Stock, $0.001 Par Value, 60,000,000 Shares Authorized: (17,782,000 Shares Outstanding) Additional Pald-in Capital Retained Earnings Total Shareholder's Equity 18 173,968 116,695 290,681 Total Assets 486,068 Total Liabilities and Shareholders' Equity 486,068 Draw The Line? 69 Table 5 ProChem Pharmaceuticals Income Statement ('000s) Total Revenues Total Cost of Revenues Gross Profit Total Operating Expenses Income (loss) from Operations Interest Expense Interest and Other Income, Net Income (loss) Before Income Taxes Provision (benefit) for Income Taxes Net Income Dividends Paid Dividends Per Share 416,497 243,981 172,516 75,855 96,661 (1,693) 3,903 98,871 34,605 64,266 30,848 1.73 10. Based upon your results, where should Cecil draw the line when it comes to deciding between the four product acquisi- 7. Develop an investment opportunity schedule (IOS) for ProChem. 8. How many break points will the firm's marginal cost of capital schedule (MCC schedule) have? Why? 9. Develop the firm's MCC schedule. Note: For the cost of new equity, use the average cost of retained earnings duly adjusted for flotation costs. tions? Why