Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Use the following information to answer the questions below; Sanad Inc. is considering replacing an existing piece of equipment with a more sophisticated machine. The

Use the following information to answer the questions below;

Sanad Inc. is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given.

The firm has determined its optimal capital structure, which is composed of the following sources and target market value proportions: Source of Capital Target Market Proportions Long-term debt. 30% Preferred Stock 15% Common Stock 55%

Debt: The firm can sell a 20-year, $1,000 par value, 7 percent bond for $990. A flotation cost of 2 percent of the face value would be required in addition to the discount of $10. Preferred Stock: The firm has determined it can issue preferred stock at $65 per share par value. The stock will pay an $8.00 annual dividend. The flotation cost stock is $7 per share. Common Stock: The firm's common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year is $5.07. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.45. a new common stock issue must be underpriced at $1 per share and the firm must pay $3 per share in flotation costs.

The firm pays 20 percent taxes on ordinary income and capital gains. Sanad invests $7,000 in NWC that will be recovered at the final year of the project.

Calculate the book value of the existing asset being replaced.

Calculate the tax effect from the sale of the existing asset.

Calculate the initial investment required for the new asset.

Calculate the incremental earnings before depreciation and taxes in year 1.

Calculate the incremental depreciation in years 3 and 5.

Calculate the incremental after-tax cash flow for years t = 2 through t = 4.

Calculate the terminal cash flow, if you know that the existing machine was fully depreciated and sold at $40,000, while the proposed machine sold at $190,000 after 4 years from the date of purchase.

Calculate the firm's weighted average cost of capital assuming the firm has exhausted all retained earnings.

Calculate the cost of debt

Calculate the cost of preferred stock

Calculate the cost of common stock

the growth rate of common stock dividends

Compute the payback period for these projects

Compute the NPV?

Compute the PI?

Compute the EVA for the third year?

Determine whether the replacement decision should be accepted or not?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

QFinance The Ultimate Resource

Authors: Various Authors

1st Edition

1849300003, 978-1849300001

More Books

Students also viewed these Finance questions

Question

Describe the role of auditing. p-968

Answered: 1 week ago

Question

=+3. How appropriate would it be to conduct additional research?

Answered: 1 week ago