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Johnsons Acoustics ( JA ) is the market leader in acoustic equipment. As there is no major technological breakthrough in the acoustic industry, there is
Johnsons Acoustics JA is the market leader in acoustic equipment. As there is no major technological breakthrough in the acoustic industry, there is little growth in this industry. JA decides to diversify to a new business area: optical instruments. JA believes that, as the demand of optical lens for mobile phones is huge, the diversification will bring an excellent growth opportunity to the company. In the diversification plan, the optical instruments project will last for years and a new factory will be built. The construction of the new factory requires $ millions and it will be financed by issuing both common stocks and bonds. The information about the companys current capital structure is as follows:
The common stock is now trading at $ We have used analysts estimates to determine
that the market believes our dividends will grow at per year and the expected dividend next year will be $ The number of shares outstanding is million.
The companys year bonds that pay semiannual coupon rate of is now selling at $ The face value of the bond is $ and there are bonds outstanding.
The annual revenue, cost and profit forecast for the coming years is as follows:
$Million
Revenue
Variable cost
Fixed cost
Tax
Net Profit
Assume that Johnsons Acoustics has a tax rate. At the end of year an additional cost of $ millions net of tax will be incurred.
cost of equity
aftertax cost of debt
WACC
The project manager of JA feels that the appropriate discount rate of the new project should be above the WACC. Compute the NPV payback period and IRR of the new project.
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