Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Macon Inc. is looking at setting up a manufacturing plant in Kirksville. This will be a 5-year project. The company bought the land in Kirksville

Macon Inc. is looking at setting up a manufacturing plant in Kirksville. This will be a 5-year project. The company bought the land in Kirksville 3 years ago for $4.5 million in anticipation of using it as a warehouse. The land is now appraised for $5 million after-tax. In 5 years, the after-tax value of the land is estimated for $6 million. The plant and equipment will cost $10.92 million to build and will be depreciated straight-line to zero over the project's 5-year life. The plant and equipment will be externally financed. The flotation cost of equity is estimated to be 10% and the flotation cost of debt is estimated to be 5%. The equipment can be sold for $2 million (before-tax) at the end of the project. The project requires $3 million in initial net working capital investment to get operational. The plant will raise sales by $4 million annually and reduce production expenses by $1 million annually. The company's tax rate is 20%. Finally, the following market data on Macon Inc.'s securities are current:

Common stock: Macon Inc's most recent dividend was $2.00 per share, and dividends are expected to grow at a 5 percent annual rate indefinitely. The stock sells for $50 a share.

Debt: Macon Inc. issued a 30-year, 7 percent, semiannual bond 12 years ago. The bond sells for 115 percent of its face value.

Macon's target debt to equity (D/E) ratio is 0.25.

(a) What is the Macon Inc's WACC?

(b) What is the initial cash outlay?

(c) What is the operating cash flow?

(d) What is the terminal cash flow?

(e) What is the NPV of this project?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

A comprehensive project evaluation question Part a Weighted Average Cost of Capital WACC To calculate the WACC we need to determine the market value o... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Corporate Finance Core Principles and Applications

Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford

3rd edition

978-0077971304, 77971302, 978-0073530680, 73530689, 978-0071221160, 71221166, 978-0077905200

More Books

Students also viewed these Finance questions

Question

Calculate SE ( p ) for n=100 and the values of p given 16. p=.01

Answered: 1 week ago