Question
KentuckyHardwareCompany(KHC)isconsideringaninvestmentprojectthatrequiresanewmachineforproducingspecialtools.Thisnewmachinecosts$1,000,000andwillbedepreciatedover10yearsonastraight-linebasistowardzerosalvagevalue.KHCpaidaconsultingcompany$50,000lastyeartohelpthemdecidewhetherthereissufficientdemandforthespecialtools.Inadditiontotheinvestmentonthemachine,KHCalsoinvests$30,000innetworkingcapitalbutdecidesNOTtorecoupthenetworkingcapitalattheendoftheinvestmentproject.Thecompanypays$45,000ininterestexpensesannually.KHChasestimatedtheperformanceofthenewmachineandbelievesthatthenewmachinewillproduce$350,000peryearinsales,$130,000peryearincostofgoodssold,and$25,000peryearinadministrativeexpenses. Inordertogetanestimateofcostofcapital,KHCcollectthefollowinginformation.KHChas310,000sharesofcommonstockoutstanding,15,000sharesofpreferredstockoutstanding,and8,000issuesofcorporatebondoutstanding.Thebondshavefacevalue$1,000andcouponrate6%.Thebondsmakesemiannualcouponpayments,have25yearstomaturity,andsellfor131.472%ofpar.Thecommonstocksellsfor$56pershareandhasabetaof1.05.KHCsnextcommonstockdividendisexpectedtobe$2.80pershare,andthecommonstockdividendisexpectedtogrowat7.7%indefinitely.Thepreferredstocksellsfor$72pershareandpays$4.5annualdividend.Themarketriskpremiumis8%,T-billsareyielding4.5%,andKHCstaxrateis25%. UsetheaboveinformationtoanswerQuestions1-17. HowmuchmoneydoesKHCneedtospendtostarttheinvestmentproject(i.e.,projectcashflowattime0)? a. $1,030,000 b. $2,030,000 c. $30,000 d. $2,530,000 QUESTION 2 Should KHC include consulting fee, $50,000, in estimating project's cash flows?
KentuckyHardwareCompany(KHC)isconsideringaninvestmentprojectthatrequiresanewmachineforproducingspecialtools.Thisnewmachinecosts$1,000,000andwillbedepreciatedover10yearsonastraight-linebasistowardzerosalvagevalue.KHCpaidaconsultingcompany$50,000lastyeartohelpthemdecidewhetherthereissufficientdemandforthespecialtools.Inadditiontotheinvestmentonthemachine,KHCalsoinvests$30,000innetworkingcapitalbutdecidesNOTtorecoupthenetworkingcapitalattheendoftheinvestmentproject.Thecompanypays$45,000ininterestexpensesannually.KHChasestimatedtheperformanceofthenewmachineandbelievesthatthenewmachinewillproduce$350,000peryearinsales,$130,000peryearincostofgoodssold,and$25,000peryearinadministrativeexpenses.
Inordertogetanestimateofcostofcapital,KHCcollectthefollowinginformation.KHChas310,000sharesofcommonstockoutstanding,15,000sharesofpreferredstockoutstanding,and8,000issuesofcorporatebondoutstanding.Thebondshavefacevalue$1,000andcouponrate6%.Thebondsmakesemiannualcouponpayments,have25yearstomaturity,andsellfor131.472%ofpar.Thecommonstocksellsfor$56pershareandhasabetaof1.05.KHCsnextcommonstockdividendisexpectedtobe$2.80pershare,andthecommonstockdividendisexpectedtogrowat7.7%indefinitely.Thepreferredstocksellsfor$72pershareandpays$4.5annualdividend.Themarketriskpremiumis8%,T-billsareyielding4.5%,andKHCstaxrateis25%.
UsetheaboveinformationtoanswerQuestions1-17.
HowmuchmoneydoesKHCneedtospendtostarttheinvestmentproject(i.e.,projectcashflowattime0)?
a. $1,030,000
b. $2,030,000
c. $30,000
d. $2,530,000
QUESTION 2
-
Should KHC include consulting fee, $50,000, in estimating project's cash flows?
a. Yes.
b. No.
QUESTION 3
-
Should KHC include interest expenses, $45,000, in estimating project's cash flows?
a. No.
b. Yes.
QUESTION 4
-
What is the annual project cash flow expected to be generated from the investment project (i.e., project cash flow at time 1 - 10)?
a. $297,500
b. $171,250
c. $100,000
d. $137,500
QUESTION 5
- What is the cost of preferred stock for KHC?
a. 6.25% b. 16% c. 16 d. 6.25
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