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24. Project Evaluation This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDS). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $7.5 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $7.1 million. In five years, the aftertax value of the land will be $7.4 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $40 million to build. The following market data on DEI'S securities is current: Debt: 260,000 6.8 percent coupon bonds outstanding, 25 years to maturity, selling for 103 percent of par; the bonds have a $1,000 par value each and make semiannual payments. B = 260,000($1,000)(1.03) = $267,800,000 The cost of debt is the YTM of the company's outstanding bonds, so: P. = $1,030 = $34(PVIFA ) + $1,000(PVIF R=3.277% YTM = 3.277% x 2 = 6.55% And the aftertax cost of debt is: R = (1 - 35).0655) = .0426, or 4.26% Common stock: 9,500,000 shares outstanding, selling for $67 per share; the beta is 1.25. S-9,500,000($67) - S636,500,000 Preferred stock: 450,000 shares of 5.25 percent preferred stock outstanding, selling for $84 per share and having a par value of $100. P= 450,000(S84) = $37,800,000 The cost of preferred stock is: R = $5.25/584 = .0625, or 6.25% The total market value of the company is: V = S267,800,000+ 636,500,000+ 37,800,000 = $942,100,000 The weight of each form of financing in the company's capital structure is: Y-5267 800 000 $942 1000002943