Question 10.

Healthstream Ltd is considering the possibility of manufacturing a new motorized treadmill model. The initial outlay for the manufacturing plan is $1.5 million. Staff at Healthstream have provided the following estimates for the project.

	Estimate
Items	Most likely	Pessimistic	Optimistic
Sales	1,500	1,000	2,000
Selling price	900	750	1,000
Fixed operating cost	90,000	100,000	80,000
Variable operating cost per unit of sale	50	65	40
Life of the plan	7	4	9

You have been asked to assess the project and if possible to determine what the major uncertainties are if the project is undertaken, knowing the companys current capital structure is as follow:

Summary statement of the current financial position
	$	$
Assets
Inventory	120,000
Accounts Receivable	82,000
Land and Buildings	1,200,000
Plant and equipment	900,000
		2,302,000
Liabilities
Accounts Payable	100,000
Bank overdraft	200,000
8% bonds, $1000 face value	600,000	900,000
Shareholders' Equity
10% preference shares, $10 face value	200,000
Ordinary shares, $5 face value	1,000,000
Retained earnings	202,000	1,402,000
		2,302,000

Additional information includes:

The nominal interest rate on the bank overdraft is 12% pa, interest incurred monthly.

The bonds are currently selling at $970 each and mature in 5 years time

The preference shares are currently selling at $9.50 each

The ordinary shares are currently selling at $5.50 each

The company income tax rate is 30%

Last year, the company paid $120,000 and $28,000 dividends on ordinary shares and preference shares respectively. Also the management anticipates that dividends will grow at 5%pa.