Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEIX, a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This wil be a five-year project. The company bought some land three years ago for $3.9 million in anticipation of using it as a toxic dump site for waste chemicals, but ilt a piping system to safely discard the chemicals instead. The land was appraised last week for $4.7 million. In ve years, the aftertax value of the land will be $5.1 million, but the company expects to keep the land for a future proje The company wants to bui ld its new manufacturing plant on this land; the plant and equipment will cost S31.52 million to build. The following market data on DEI's securities is current: 224.000 7.4 percent coupon bonds outstanding, 25 years to maturity, selling for 109 percent of par the bonds have a S1,000 par value each and make semiannu payments. Common stock: 8,200,000 shares outstanding. selling for S70.40 per share: the beta is 12. Preferred stock. 444.000 shares of 4 percent preferred stock outstand ng. selling for S80.40 per share and and having a par value of $100 6 percent expected market risk premium: 4 percent risk-free rate. DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEl spreads of 9 percent on new common stock issues, 7 percent on new preferred stock issues, and 5 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profi in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI's tax rate is 38 percent. The project requires S1,150,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally. a. Calculate the project' s initial Time 0 cash fow. aking into account all side effects. Assume that the net l not require fotation costs. working capital wi Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567).) Cash flow b. The new RDS project is somewhat riskier than a typical project for DEI, primarily because the plant is being located overseas. Management has told you to use an adjustment factor of 3 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI's project. Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16 Discount rate c. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciaton. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for S3.9 milion. What is the aftertax salvage value of this plant and equipment? (Do not round intermediate calculations. Enter your answer in dollars, not millions of dollars (e.g., 1,234,567) Aftertax salvage value
