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Company XYZ has the following capital structure as of 12/31/10: Debt 250,000 Equity (Common Stock) 100,000 Equity (Preferred Stock) 50,000 The company expects to maintain
Company XYZ has the following capital structure as of 12/31/10: | |||
Debt | 250,000 | ||
Equity (Common Stock) | 100,000 | ||
Equity (Preferred Stock) | 50,000 | ||
The company expects to maintain this capital structure in the future and any future | |||
financing will be done as they have done in the past. | |||
In '11, they are considering the purchase of as asset which would cost $75,000. The '11 information | |||
includes the impact of this asset. All changes from '10 to '11 can be attributed to the benefits | |||
of this asset. | |||
The asset would be depreciated based on 10 year MACRS. The project will be evaluated | |||
over 3 years. | |||
The company's financial situation is as follows: | |||
12/31/10 | 12/31/11 | ||
Revenue | 1,000,000 | 1,094,000 | |
Expenses | 880,000 | 935,000 | |
Revenue is expected to increase by 4% each and every year (after year 1) ; Expenses are | |||
expected to decrease by 2% each and every year (after year 1). | |||
Company is in the 40% tax bracket | |||
Select information relative to projected stock prices, dividends and bond rates are as follows: | |||
Stock prices: | |||
Common - projected'11 | 50.00 | Preferred - projected'11 | 55.00 |
Dividends | |||
Dividend - Common '07 | 0.75 | ||
Dividend - Common '08 | 0.82 | ||
Dividend - Common '09 | 0.87 | ||
Dividend - Common '10 | 0.94 | Dividend - Preferred '11-projected | 2.85 |
Bond - Market rates | |||
Market rate - '09 | 11.0% | ||
Market rate - '10 | 12.0% | ||
Market rate - '11 | 10.0% | ||
Anticipated administrative cost to issue stock are as follows: | |||
Common | 5% of sales price | ||
Preferred | 6% of sales price | ||
Based on NPV - at Cost of Capital plus 3% - should the asset be purchased? | |||
Based on NPV - If the company elects to finance strictly via bonds - should the purchase be made? | |||
What is the IRR of this project? | |||
What is the Payback? | |||
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