Important Note: All the intermediate steps and calculations that you use in arriving to the final results must be shown in your answers. 1) Suppose that you are the financial manager of Onyx Corp. This firm considers to buy a machine in 2020 whose cost is $ 10 000 000. The cost of investment is paid in 2020. The expected lifetime of the machine is 5 years. That machine is subject to 5-year straight line depreciation allowing the firm to write off a $ 2 000 000 depreciation expense in each year from 2021 to 2025. The firm wants to know if that investment is feasible given the following information The last available balance sheet of that firm is as follows: Assets: Current Assets: $ 60 000 000 Long-Term Assets: $200 000 000 Total Assets: $ 260 000 000 Liability and Equity: Accrued Expenses $ 3 000 000 Account Payables $ 7000 000 Short-Term Loan $50 000 000 Long-Term Loan $ 100 000 000 Equity as Preferred Stock: $ 20 000 000 Equity as Common Stock: $ 80 000 000 Total Liab, and Equity $ 260 000 000 2/8 The following information is also given: The firm has one short-term loan and the firm pays an annual interest rate of 10% on this loan. The firm has one long-term loan of $ 100 000 000 and the firm pays an annual interest rate of 12% on that long-term loan. The corporate tax rate is 20% The firm expects to pay a dividend of $3 per share to preferred stock holders next year and to pay a dividend of $ 2.5 per share to common stock holders next year. The current market value of the preferred stock is $ 30 per share and the current market value of the common stock is s 25 per share. Onyx Corp. uses dividend discount method to find the cost of equity and expects an annual growth rate of 5% in future dividends. This investment is expected to increase the sales revenue of the firm as follows 2021 2022 2023 2024 2025 $ 5 000 000 $ 7 000 000 $ 8 000 000 $ 6 000 000 $ 5 000 000 The COGS (Cost of Goods Sold) of that investment is 40% of the sales revenue and the general administrative costs of that investment is 10% of the sales revenue in each of the years above. This investment is expected to increase the inventories by $ 200 000 in 2021. It is also estimated that accounts receivables will increase by $ 300 000 in 2021 and account payables will increase by $ 100 000 in 2021 because of that investment. There will be no change in inventories, account receivables and account payables in the years 2022 and 2023. The firm expects that inventories will decline by S 50 000, account receivables will decline by $ 70 000 and account payables will decline by S 20 000 in 2024. All the remaining inventories will be sold in 2025 and all remaining account receivables will be received in 2025. The firm also will pay all remaining account payables in 2025. 3/6 Finally, the firm estimates that it can sell this machine by the end of 2025 for a value of $ 1 300 000 (salvage value of the machine is $ 1 300 000). Given that information a) Find the relevant discount rate (WACC) of that firm b) Estimate the operating cash flow and the net cash flow of that firm for years 2021 2022 2023 2024 and 2025 using information above. c) Calculate the net PV of that investment using the discount rate (WACC) that you will find in 1a above and decide it that investment is feasible or not. Also mention how much the value of the firm may increase by that investment. Note: Use up to 4 decimals (e.g 0.1721) in your calculations. Important Note: All the intermediate steps and calculations that you use in arriving to the final results must be shown in your answers. 1) Suppose that you are the financial manager of Onyx Corp. This firm considers to buy a machine in 2020 whose cost is $ 10 000 000. The cost of investment is paid in 2020. The expected lifetime of the machine is 5 years. That machine is subject to 5-year straight line depreciation allowing the firm to write off a $ 2 000 000 depreciation expense in each year from 2021 to 2025. The firm wants to know if that investment is feasible given the following information The last available balance sheet of that firm is as follows: Assets: Current Assets: $ 60 000 000 Long-Term Assets: $200 000 000 Total Assets: $ 260 000 000 Liability and Equity: Accrued Expenses $ 3 000 000 Account Payables $ 7000 000 Short-Term Loan $50 000 000 Long-Term Loan $ 100 000 000 Equity as Preferred Stock: $ 20 000 000 Equity as Common Stock: $ 80 000 000 Total Liab, and Equity $ 260 000 000 2/8 The following information is also given: The firm has one short-term loan and the firm pays an annual interest rate of 10% on this loan. The firm has one long-term loan of $ 100 000 000 and the firm pays an annual interest rate of 12% on that long-term loan. The corporate tax rate is 20% The firm expects to pay a dividend of $3 per share to preferred stock holders next year and to pay a dividend of $ 2.5 per share to common stock holders next year. The current market value of the preferred stock is $ 30 per share and the current market value of the common stock is s 25 per share. Onyx Corp. uses dividend discount method to find the cost of equity and expects an annual growth rate of 5% in future dividends. This investment is expected to increase the sales revenue of the firm as follows 2021 2022 2023 2024 2025 $ 5 000 000 $ 7 000 000 $ 8 000 000 $ 6 000 000 $ 5 000 000 The COGS (Cost of Goods Sold) of that investment is 40% of the sales revenue and the general administrative costs of that investment is 10% of the sales revenue in each of the years above. This investment is expected to increase the inventories by $ 200 000 in 2021. It is also estimated that accounts receivables will increase by $ 300 000 in 2021 and account payables will increase by $ 100 000 in 2021 because of that investment. There will be no change in inventories, account receivables and account payables in the years 2022 and 2023. The firm expects that inventories will decline by S 50 000, account receivables will decline by $ 70 000 and account payables will decline by S 20 000 in 2024. All the remaining inventories will be sold in 2025 and all remaining account receivables will be received in 2025. The firm also will pay all remaining account payables in 2025. 3/6 Finally, the firm estimates that it can sell this machine by the end of 2025 for a value of $ 1 300 000 (salvage value of the machine is $ 1 300 000). Given that information a) Find the relevant discount rate (WACC) of that firm b) Estimate the operating cash flow and the net cash flow of that firm for years 2021 2022 2023 2024 and 2025 using information above. c) Calculate the net PV of that investment using the discount rate (WACC) that you will find in 1a above and decide it that investment is feasible or not. Also mention how much the value of the firm may increase by that investment. Note: Use up to 4 decimals (e.g 0.1721) in your calculations
