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what is the
What is the YTM
What is the cost of preferred stock?
What is the rate of equity?
What is the after tax cost of debt?
What is the market value of the debt in dollars?
What is the market value of the firm?
Preferred stock what portion of the capital structure of the firm?
What is the weighted cost of equity?
What is the weighted average cost of capital?
What is the weighted floatation cost of debt?
What is the weighted average floatation cost?
What is the total floatation cost?
What is the Free cash flow for time periods 1-4?
What is the NPV of the project?
What is the IRR of the project?
Defense Electronics Worksheet 1-Excel Sign in X Tell me what you want to do AShare File Homr Insert Page laynut Formulas Data Revicw View Hrlp Online Pictures Screenshot A Tt Equation Get Add-ins Shapes Symbal 20. PivotTable Recommended Table Pictures Recommendod PiyotChart 3D Line Column Win Link Slicer Timeline Text ader My Add-ins SmartArt Map Bax& Foruter Pivot Tables Charts Loss Sparkines Tebles lustralions Add ns Charts Tours lers Lnks Tet Symbols A T31 H J K T M 8 NO L N x AH Defense Electronics 2 Cost of Capital 4 Prefered 50cc Cermar tcck Deat 210 t 64% 450,00 79 atar of shares es prke per share 7 CCupon rale a re io alarty PVs% of oar price per stare dvdand 40 bra 13 110% mart rekarer 6,% 10 par valu 2 1paymente per ye 12 18 GOSTS Rale ol ralcod 14 1 ale ol Det 10 tatasrT als al culy Dvdend ets 1T Fulare Vua 18 PrstVN 15 Coapen payert R 21 Alar Ta Harke: Bai Prenan Rirk ree Rat R Naket Vau Ct af Cant Cost Ieeshted Cast 24 Soarce Prefered 2 27 tuty 2 Islal WALC Weghted Average rlotation Gosse Natbel W a rlatan SuataWaghiad Coal 000% 003% S1 22 Baar 88 Dat 24 helue s6 tay 03% 7 Tets WAFG a0% 40 42 42 CH Capital Budgeting Cost of Capital +oU e 606 PM ENG 23 11/16/2019 Type here to search Defense Electronics This is a comprehensive project evaluation problem bringing together much of what you have learned in this and previous chapters. Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large publicly traded firm that is the market share leader in radar detection systems (RDS8). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSS. This will be a five-year project. In order to facilitate this project, DEI purchased some land where they will build their new manufacturing plant, which cost $4.4 milion on an after-tax basis. In five years, the after-tax value of the land will be $4.8 million. The plant and equipment will cost $37 million to build. DEI's tax rate is 32 percent. The project requires $1,300,000 in initial net working capital investment to get operational. The manufacturing plant has an eight-year tax life, and DEI uses straight-line depreciation. At the end of the project (that is, the end of Year 5), the plant and equipment can be scrapped for $5.1 million The company will incur $6,700,000 in annual fixed costs. The plan is to manufacture 15,300 RDSS per year and sell them at $i1,450 per machine; the variable production costs are $9,500 per RDS The following market data on DEI's securities are curent Debt: 210,000 6.4% coupon bonds outstanding, 25 years to maturity, selling for 110 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 8,300,000 shares outstanding, selling for $68 per share; the beta is 1.3 Preferred stock: 450,000 shares of preferred stock outstanding, selling for $79 per share with a dividend of $4.50 Market: 6 percent expected market risk premium; 3.5 percent risk-free rate DEI uses HSOB as its lead underwriter. HSOB charges DEI 10% flotation costs on new common stock issues, 6% on new preferred stock issues, and 4% on new debt issues. Assume DEI raises all equity for new projects externally Calculate the NPV and the IRR of the proposed project Some notes that will help you with this case: 1- When calculating the free cash flow for time 0, remember to include flotation costs as described above. The total cost will be the cost of the land, the cost of the building, the cost of the increase in working capital, and the flotation costs. Even though we already own the land and it might appear to be a sunk cost, remember that if we weren't building the plant on the land we could use it for something else, meaning that there is an opportunity cost associated with it. Because of this, the cost of the land should be included. Be sure to put this cost under the tax line as we are dealing with after tax values The cost of the building and working capital will require new financing and therefore financing costs. Thus the building and working capital must be adjusted for the flotation costs as discussed in section 14-7 of the 11th edition and 14-6 of the 10th edition of the text. It is not necessary to adjust the land costs since we already own the land. 2- The appropriate amount to depreciate is just the cost of the building (37,000,000) Financing costs and the cost of the land should not be included. 3- In year 5, remember to include the salvage value of the land. Because the value that you are given is an after tax amount, be sure to put it under the tax line. Also remember that although the working capital will be recovered at the end of the project, the financing costs from working capital will not
