D Question 13 (All Chapters - Long-answer question. Use the following information to answer questions 13 to 25. If you do not know a particular answer please make a reasonable assumption and state that you have assumed the answer You are the CFO of The Imaginary Products Co. The company provides the following information about its capital structure: Debt: The firm has 200,000 bonds outstanding with a par value of $1,000, pays 9 percent interest (semi-annual coupon payments). have a maturity of 15 years and have a quoted price of 137.55 per bond. Preferred Shares: The firm also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per share. The preferred shares pay an annual dividend of 2.4 percent on the par value of $50.00 Common Stock: The company also has 14 million shares of common stock outstanding with a price of $20,00 per share. The firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever. The firm is considering a three-year expansion project (same operations as the existing projects of the firm) that requires a purchase of a machine of $210,000. There will be an increase in inventory of $150,000, accounts receivable of $35,000, and accounts payable of $75,000. The machine will be in the 3-year MACRS class and the annual depreciation rates are 33 percent in year 1.44 percent in year 2, 15 percent in year 3 and 8 percent in year 4. The project is expected to generate Earnings Before Interest, Taxes. Depreciation and Amortization (EBITDA) of $80,000 each year. At the end of the project (year 3), the machine can be sold for $25,000. The firm's tax rate is 21 percent. A B D E ANS A COST OF EQUITY = D1/PO+ g = 16.00% (=2.2/20 + 0.05) ANS B COST OF PREFERRED STOCK = D/PO = 10.00% (=(2.4%*50)/12] COST OF DEBT BA II PLUS SET C/Y=P/Y = 2 N PV PMT FV 1/Y = YTM = 30 (15 X 2] 1375.5 (=137.55%*1000) -45 (1000 X 9%/2] -1000 5.33% CPT ANS C BEFOR TAX COST OF DEBT = YTM = AFTER TAX COST OF DEBT = YTM*(1-t)= 5.33% 4.21% (5.33%*(1-0.21)] H828 B D F G B 818 819 820 DEBT COMMON STOCK PREFERRRED STOCK A 200000 14000000 2000000 1375.5 20 12 E AB 275100000 280000000 24000000 579100000 0.4750 0.4835 0.0414 821 822 823 824 ANS 1 825 WEIGHT OF EQUITY DEBT PREFERRED STOCK 826 48.35% 47.50% 4.14% 827 WACC 828 829 830 831 832 833 834 835 ANS 2 836 837 838 ANS 3 839 840 841 DEBT COMMON STOCK PREFERRRED STOCK WEIGHTS 0.4750 0.4835 0.0414 WACC = COC (%) WEIGHTED COST B AB 4.21% 2.00% 16.00% 7.74% 10.00% 0.41% 10.15% NET CASH FLOW AT TIME = = COST OF MACHINE WORKING CAPITAL NET CASH FLOW -210000 -110000 150000 +35000 - 75000) -320000 What is the annual depreciation in years 1, 2, and 3? What is the annual cash flow from operations in years 1, 2, and 3? Compute the after-tax salvage value in year 3
