Suppose you have been hired as s finsncial conaulsont to Defense Electronics,

incorporsted $($DE$),$ s lsrge, publicy treded firm that is the market shsre lesder in rodsr

detect$/$on systems $[$RDSs$].$ The compsny ls looking st setting up s monufscturing plant

oversess to produse $s$ new line of ROSs. Thls will be s five$-$yesr project. The compony

bought some isnd three years sgo for $$3\mathrm{.}6$ million in snticipstion of uaing it $8$a toxis

dump site for waste chemicsls, but it bult s plping syatem to ssfely dacsod the

chemicals instesd. The land wss spprsised last week for $$67$ million on on stertax

bosla. in five yesrs, the sftertox value of the lond will be $$7\mathrm{.}1$ million, but the compony

expects to keep the land for s future project. The campony wonts to buld its new

manufocturing plant on this lsnd; the plant sne equlpment will cost $$33\mathrm{.}3$ million to build.

The following morket dsto an DEl's securites are current:

Debr: $,280,000$ bonds with $3$ coupon rate of $67$ percent outstending. $25$ yes$/$s

to moturity, seling for $107$ persent of per; the bonds have o $$1,000$ psr

vo ue esch and moles semisnnusl psyments.

Common $,10,200,000$ shsres outz:snding, selling for $$75\mathrm{.}20$ per shere; the bets is

stock: $,1\mathrm{.}15.$

Preferred $,500,000$ shores of $4\mathrm{.}5$ percent preferred stock outstending, seling for

stock: $$84\mathrm{.}75$ per shore. The par volue is $$100.$

Morket: $,6\mathrm{.}7$ percent expected market righ premium; $3\mathrm{.}6$ percent riakfree rate.

DEI uses G$.$M$.$ Wharton as its lesd underwriter Wharton chsrges DEl spresds of $7\mathrm{.}5$

percent on new common stack lasues, $5$ percent an new preferred stock lasues, snd $3$

percent on new debt issues. Wharton has Included all direct snd indirect lssusnce costs

$($olang wth its prafit$)$ in setting these spresdz. Wharton hss recommended to DEI thet it

relse the funds needed to bulid the plant by lasuling new shsres of common stock. DEI's

tsx rate is $24$ percent. The project requlres $$1,650,000$ in inltisl net working copitsal

investment to get operstionsl. Asaume DEl resse: sll equity for new projects extemslly

and that the NWC does nat requlre floststion costs.

a$.$ Colcuiste the project'; inital Time $0$ cosh flow, toking into sccount sull side effecta. $[$A

negative snswer should be Indicated by a minus slgn$.$ Do not round lintermediate

calculations and enter your answer In dollars, not millions of dollars, rounded to

the nearest whole number, eg$.,1,234,567.)$

b$.$ The new RDS project is somewhat riakler than o typicel project for DEl, primsrly

becsuse the plant is being loceted oversess. Monsgement has told you to use on

sol'ustment factor of $+25$ percent to sccount for this incressed rolalioss. Cslculste the

sppropriste discount rste to use when evolusting DEr's project. $($Do not round

intermedlate calculations snd enter your snswer as a percent rounded to $2$ decimal

ploces, eg$..32\mathrm{.}16.)$

c$.$ The monufacturing plant has an eight$-$year tsx lfie, snd DEl uses strsight$-$Ine

depreciation to $s$ zero solvege volue. At the end of the project $($thes la$,$ the end of Yesr

$,$ the plant and equlpment can be scropped for $$5\mathrm{.}9$mli ion. What is the sftertax

salvoge vslue of th$\text{'}$s plont snd equipment? $($Do not round Intermediste calculations

and enter your answer in dollers, not millions of dollars, rounded to the nearest

whole number, e$-$g$.,1,234,567.)$

d$.$ The compsny will incur $$8,200,000$ in onnusl fixed costs. The plon is to monufiscture

$9,725$ RDGs per year sne sell them at $$11,140$ per mochine; the virroble productian

coats sre $$9,875$ per RDS$.$ What is the snnusl apersting cesh flow $($OCF$)$ from thls

project? $($Do not round intermediste calculations and enter your answer in doliars,

not millians of dollors, rounded to the nearest whole number, e$.$g$.,1,234,567.)$

e$.$ DEI's comptroller lis primerily interested in the impoct of DEI's investments on the

bottom line of reported sccounting ststements. What will you tell her Is the sccounting

break$-$even qusntty of RDS: sold for th$\text{'}$s project? $($Do not round lntermediste

calculations and round your answer to nearest whole number, e$\mathrm{.}9.,32)$

f$.$ Fins y$,$ DEI's president wants you to throw sll your calcui ations, assumptians, snd

everything e se into the report for the chief finsnelal officer, sll he wanta to know Is

what the RDS project's internel rste of return $($IRR$)$ and net present value $($NFV$)$ are.

$($Do not round Intermedlate calculations. Enter your NPV in dollars, not millions