Keltic Electronic Corporation (KEC) Marker 6 percent expected market risk premium: 3 percent risk-tree rate. Keltic Electronic Corporation (KEC) is a global electronic and semiconductor company based in the Silicon Valley. In the power semiconductor field, especially circit and assembly technologies, the company has been creating the custom power units and module products used as the core of a wide variety of electronic equipment through the general development of a variety of technoloeies which are used Tesla, KLA-Tencor. A&D Precision, Vector Technology, and Verifone. The application of lhese products has been expanding in indusril eqipnent (production machinery. automation lines, various power supplies, etc.), hone appliances (air conditioners, refrigerators, etc.) d he ields of lhigh power and high reliability KEC uses J.M. Watson as its Iead underwriter. Watson charges KEC spreads of 5 percent on new common stock issues, 3 percent on new preferred stock issues, and 2 percent on new debt issues. Watson has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Watson has recommended to KEC that it raise the funds needed based on its capital structure. The project requies S1,500,00 in initial net working capital investment to get operational nd KEC's lax rale is 40 perce The company will incur $6,000,000 in annual fixed costs. The plan is to mauufacture 16,000 Semiconductor per year and sell themat s10,250 per machine; the vaiable production costs are S9,000 per circuit board. Tesla Corporation has asked KEC to produce new semiconductor circuit board for its all electric cars, Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. You bave just been hired by KEC in their capital budgeting division Your lirst assignment is lo determine the free cash lows and quantitative methods to evaluate the profitability of the roquest by bolh companies Part I a. Whieh qulilalie methods ure uscful to evnluate the projoet? b. Diseuss the strengths and weaknesses of the quantitative methods you will use to is a global capital KI.A-Tencor also asked KI to produce semiconductor for its client. KI.A-lencor supplies process control and yield manageet systemsfor the semiconductor industry and other related nanoelectronics industries t company hased in Milpitas, California has evaluate the pojecls. Assume KCuses internal cash flow to finance new projects. c. KCs comptroller is primarily interested in the impact of Kls investments on the hottom line of reported accounting statements. What will yo tell her abot the operating and accounting break-even quantity of Semicondutor sold for this project? The company is lookin al sctling up a ulacturing plan o pruduce a new semiotor circuil bourd. This will be livoyeur projvel. The compuny boughl a warchouse thro yours ungo lor 54.0 millioa in anlicipalion olsing or ils expansion. The warchouse alicr conversion to muufacturing will hve a value ol $6 mill day but the ronl eslale appraisal indicates il will hav the aller-lax value of$8 million in live years. The company has no inln ol selling e planl. The new mamifacturingill require new equipment that will cost S40 million. The new equipment has an eight-year tax life, and KIC uses straight-line depreciation to ero. At the end of the project (that is. the end of yer 5), the quipment can be scrapped for $4 million. d. Calculate the project's initial Time cash flow, considering all side effects. e. What is the unual opcrating cash low (OCF) nd fre cash low (FCF) Iom his projeet? f. The ncw semicunductor project is somewhat riskier hn a typieal projeet for KEC, primarily because the new semiconductor nplacos the old o and has not becn tested by the market. Management wants you to use an adjuslme factor ol +2 pervent to account lor this incrased riskiness. Caleulate the appropriale disoount rate touse when evuluating KEC's project. The manufacturing of semiconductor requires initial investment of 51,500,000 in net working capital investment to get operational. The net working capital will increase by 3percent during operation and will be recovered at the end of operation. t. Finally. KEC's president wanis you to hrow all your calculations, assumptions. and overything clse inlo the reporl for the chiefial officer, all he wants to know is the new project prolitable based on your quantitative analysis? The following market data on KEC s securities are current: Assme KEC raises the funds needed externally for new projects including financing the NWC Deb 500.000 10 percent coupon bonds outstanding. 20 years to manurity, selling for 1030 percent of par; the bonds have a S1,000 par vaue each and make semiannual payments. h. Is the project still protitable hased on your quantitative analysis? Common stok: 8.000,000 shares outstanding, selling for $90 per share; the beta is 1.5. Preferred stock: 1,500,000 shares of 4 percent preferred stock outstanding, selling for $84 per hare Keltic Electronic Corporation (KEC) Marker 6 percent expected market risk premium: 3 percent risk-tree rate. Keltic Electronic Corporation (KEC) is a global electronic and semiconductor company based in the Silicon Valley. In the power semiconductor field, especially circit and assembly technologies, the company has been creating the custom power units and module products used as the core of a wide variety of electronic equipment through the general development of a variety of technoloeies which are used Tesla, KLA-Tencor. A&D Precision, Vector Technology, and Verifone. The application of lhese products has been expanding in indusril eqipnent (production machinery. automation lines, various power supplies, etc.), hone appliances (air conditioners, refrigerators, etc.) d he ields of lhigh power and high reliability KEC uses J.M. Watson as its Iead underwriter. Watson charges KEC spreads of 5 percent on new common stock issues, 3 percent on new preferred stock issues, and 2 percent on new debt issues. Watson has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Watson has recommended to KEC that it raise the funds needed based on its capital structure. The project requies S1,500,00 in initial net working capital investment to get operational nd KEC's lax rale is 40 perce The company will incur $6,000,000 in annual fixed costs. The plan is to mauufacture 16,000 Semiconductor per year and sell themat s10,250 per machine; the vaiable production costs are S9,000 per circuit board. Tesla Corporation has asked KEC to produce new semiconductor circuit board for its all electric cars, Founded in 2003 and based in Palo Alto, California, Tesla is a vertically integrated sustainable energy company that also aims to transition the world to electric mobility by making electric vehicles. You bave just been hired by KEC in their capital budgeting division Your lirst assignment is lo determine the free cash lows and quantitative methods to evaluate the profitability of the roquest by bolh companies Part I a. Whieh qulilalie methods ure uscful to evnluate the projoet? b. Diseuss the strengths and weaknesses of the quantitative methods you will use to is a global capital KI.A-Tencor also asked KI to produce semiconductor for its client. KI.A-lencor supplies process control and yield manageet systemsfor the semiconductor industry and other related nanoelectronics industries t company hased in Milpitas, California has evaluate the pojecls. Assume KCuses internal cash flow to finance new projects. c. KCs comptroller is primarily interested in the impact of Kls investments on the hottom line of reported accounting statements. What will yo tell her abot the operating and accounting break-even quantity of Semicondutor sold for this project? The company is lookin al sctling up a ulacturing plan o pruduce a new semiotor circuil bourd. This will be livoyeur projvel. The compuny boughl a warchouse thro yours ungo lor 54.0 millioa in anlicipalion olsing or ils expansion. The warchouse alicr conversion to muufacturing will hve a value ol $6 mill day but the ronl eslale appraisal indicates il will hav the aller-lax value of$8 million in live years. The company has no inln ol selling e planl. The new mamifacturingill require new equipment that will cost S40 million. The new equipment has an eight-year tax life, and KIC uses straight-line depreciation to ero. At the end of the project (that is. the end of yer 5), the quipment can be scrapped for $4 million. d. Calculate the project's initial Time cash flow, considering all side effects. e. What is the unual opcrating cash low (OCF) nd fre cash low (FCF) Iom his projeet? f. The ncw semicunductor project is somewhat riskier hn a typieal projeet for KEC, primarily because the new semiconductor nplacos the old o and has not becn tested by the market. Management wants you to use an adjuslme factor ol +2 pervent to account lor this incrased riskiness. Caleulate the appropriale disoount rate touse when evuluating KEC's project. The manufacturing of semiconductor requires initial investment of 51,500,000 in net working capital investment to get operational. The net working capital will increase by 3percent during operation and will be recovered at the end of operation. t. Finally. KEC's president wanis you to hrow all your calculations, assumptions. and overything clse inlo the reporl for the chiefial officer, all he wants to know is the new project prolitable based on your quantitative analysis? The following market data on KEC s securities are current: Assme KEC raises the funds needed externally for new projects including financing the NWC Deb 500.000 10 percent coupon bonds outstanding. 20 years to manurity, selling for 1030 percent of par; the bonds have a S1,000 par vaue each and make semiannual payments. h. Is the project still protitable hased on your quantitative analysis? Common stok: 8.000,000 shares outstanding, selling for $90 per share; the beta is 1.5. Preferred stock: 1,500,000 shares of 4 percent preferred stock outstanding, selling for $84 per hare