Question $7$

MAKE SURE YOU COMPLETE ALL QUESTIONS WITHIN THIS PROBLEM. THERE ARE $14$ DROPDOWN

BOXES TO COMPLETE. You will receive partial credit for all correct answers.

The Phillips Company is considering increasing its headphone production capacity to fulfill a large

private contract. The CFO has tasked her finance staff to analyze the project and make a

recommendation to the executive team to be included at next month's board meeting. The CFO

provides the following information to the analyst:

COST OF CAPITAL

Phillips' current capital structure is comprised of $$300,000,000$ in debt, $$150,000,000$ in preferred

equity, and $$450,000,000$ in common equity. Phillips currently has issued bonds that mature in $10$

years with a coupon rate of $7\mathrm{.}5\%$ and a current market price of $$865.$ Preferred shares of Phillips are

trading at $$\frac{67}{?}$ share and pay an annual dividend of $$\frac{1\mathrm{.}75}{?}$ share. Common stock of Phillips has a

beta of $1\mathrm{.}1$ and trades at $$\frac{46}{?}$ share. The $10-$year US treasury yield is $4\mathrm{.}25\%.$ The market risk

premium is estimated at $7\mathrm{.}75\%.$ Their tax rate is $35\%.$

Round answers to four decimal places $($ie$\mathrm{.}1125$ or $11\mathrm{.}25\%)$

What is the current cost of Phillips debt capital?

What is the current cost of Phillips preferred equity capital?

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What is the current cost of Phillips common equity capital $($using CAPM$)?$

What is Phillips Weight Averaged Cost of Capital?

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Use your answers above and the information below to complete the remaining questions.

PROJECT CASH FLOWS

Philips expects to invest $$18,500,000$ in new$/$plant equipment. The contract will last for $10$ years, at

which point it expects its plant equipment to have a salvage value of $$7,000,000.$ They plan to

finance this project using $65\%$ debt and $35\%$ equity. Their investment banker advises there are

transaction costs of $2\mathrm{.}0\%$ on debt and $11\mathrm{.}0\%$ on equity. Phillips expects to increase its accounts

receivable by $$1,500,000,$ its inventory by $$4,000,000,$ and its accounts payable by $$2,500,000.$ It

expects to sell $45,000$ units at a price of $$275/$unit$,$ with variable cost per unit of $$165.$ It expects

additional operating costs each year of $$900,000.$ Phillips tax rate is $35\%.$

What is the annual depreciation for the fixed assets of this project?

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What is the firm's weighted average flotation cost? $($round to four decimal places$)$

@$1$

What is the firm's flotation adjusted Initial Capital Expenditure? $($round to nearest $$100,000)$

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What is the projected Cash flow at Year $0?($round to nearest $$100,000)$

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What is expected Cash flow Year $1-9?($round to nearest $$100,000)$

$[$ Select $]$

What is the expected Cash Flow of Year $10?($round to nearest $$100,000)$

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What is the project's Net Present Value?

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What is the project's Internal Rate of Return?

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$-$What is Phillips Accounting Break$-$even unit sales level?

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What is Phillips Cash Break$-$even unit sales level?

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