Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Coca Cola Inc. is considering opening a new bottling plant in the Southeastern U.S. It anticipates that this plant will increase sales by $8 million

Coca Cola Inc. is considering opening a new bottling plant in the Southeastern U.S. It anticipates that this plant will increase sales by $8 million per year over the next 15 years. Costs to operate the plant are estimated to be $3 million per year. The company estimates that the cost of constructing the plant along with the cost of the equipment will be $30 million. These costs can be depreciated using straight-line depreciation. At the end of 15 years, it is estimated that the equipment and facilities can be sold for $5 million. The plant will require an initial increase in the companys working capital of $3 million. Funds to finance the plant will be raised in exactly the same proportion as Coca-Colas current financial structure. Coke maintains very low leverage. It currently has 15 million bonds outstanding that have $1000 face value and trade for 100% of par value. It has 2 billion outstanding shares, that currently trade for $60/share. The bonds have a beta of 0.05, while the stock has a beta of 0.50. The risk free rate is 6%, and the expected return on the S&P 500 is 14%. Coke is currently in the 35% tax bracket. Should Coke go ahead with the planned expansion?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: Jack Kapoor, Les Dlabay, Robert Hughes

10th Edition

0073530697, 9780073530697

More Books

Students also viewed these Finance questions

Question

1. To gain knowledge about the way information is stored in memory.

Answered: 1 week ago