Question
Since the analysis of the capital budgeting project indicates that the project should not be implemented, Axylotl Industries, Inc. has a problem.They have already signed
Since the analysis of the capital budgeting project indicates that the project should not be implemented, Axylotl Industries, Inc. has a problem.They have already signed the contract to produce the material.Management is now searching for ways to make the project viable and has settled on exploring the potential opportunities of a different financial structure.The board has asked you to evaluate the cost of equity and the weighted average cost of capital for three alternative ways to finance the project.
First, finance the entire cost of the project, including working capital, at the existing debt to equity ratio and weighted average cost of capital.Second, finance the entire project investment with 50% debt and 50% equity and find the effect on the cost of capital.Third, finance the entire project investment with 100% equity.The latter two alternatives require a change in the cost of equity which results in a change in the weighted average cost of capital.
Use book weights and the following information in your calculation.
Market Risk Premium0.09.
T-Bill Rate0.03
T-Bond Rate0.039
Tax Rate0.35
Beta1.25
Current Long-Term Debt Yield0.058
Preliminary Discount Rate0.14
Axylotl Industries, Inc.
Balance Sheet as of December 31, 2020
Thousands of $
Assets
Current Assets:
Cash
37,000
Accounts Receivable
96,000
Inventory
131,200
Total Current Assets
264,200
Long-Term Assets:
Plant, Property and Equipment
186,000
Other Assets
21,700
Total Long-Term Assets
207,700
Total Assets
471.900
Liabilities and Equity
Current Liabilities:
Accounts Payable
63,000
Commercial Paper
0
Accrued Expenses and Taxes
17,000
Long Term Debt Maturing within 1 Year
Capital Lease Obligations Due within 1 Year
Total Current Liabilities
80,000
Long Term Liabilities:
Long-Term Debt
167,500
Capital Lease Obligations
Deferred Income Taxes
Total Long-Term Liabilities
167,500
Total Liabilities
247,500
Shareholder Equity:
Common Stock
18,000
Capital in Excess of Par
18,000
Retained Earnings
188,400
Total Equity
224,400
Total Liabilities and Equity
457.200
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Income Tax Fundamentals 2013
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
31st Edition
1111972516, 978-1285586618, 1285586611, 978-1285613109, 978-1111972516
