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 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 (RDSs). 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 million 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 xed costs. The plan is to manufacture 15,300 RDSs per year and sell them at $11,450 per machine; the variable production costs are $9,500 per RDS. The following market data on DEI's securities are current: 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% otation 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 [RR of the proposed project. Some notes that will help you with this case: 1- When calculating the free cash ow for time 0, remember to include otation 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 otation 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 nancing and therefore nancing costs. Thus the building and working capital must be adjusted for the otation costs as discussed in section 14-7 of the 11Ih edition and 14-6 of the 10m edition of the text. It is not necessary to adjust the land costs since we already own the land. 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. 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. Defense Electronics Worksheet-1 - Excel Sign in X File Home Insert Page Layout Formulas Data Review View Help Tell me what you want to do Share Online Pictures + Screenshot Get Add-ins b 12 A A T Equation . PivotTable Recommended Table Pictures Shapes ~ SmartArt My Add-ins Recommended PivotChart 3D Line Column Win/ Slicer Timeline Link Text Header 2 Symbol PivotTables Charts Map - Loss Box - & Footer Tables Illustrations Add-ins Charts Tours Sparklines Filters Links Text Symbols T31 X V C D E F G H M N P Q R S T w Z AA AB AC AD AE AF AG AH Defense Electronics 3 Cost of Capital 5 Debt DATA 6 # of bonds 210,000 Preferred Stock # of shares Common Stock price per share 450,000 79 # of shares ####### coupon rate 6.4% 68 8 years to maturity 25 dividend 1 50 price per share beta 13 9 PV as a % of par 10% 5.0% 10 par value 1000 market risk premi risk free rate 3.5% 11 # payments per yet 12 Tax 32% 13 14 COSTS Rate of Debt Rate of Preferred Rate of Equity 16 # of payments Dividend Beta 17 Future Value Price at 0 Market Risk Premium 18 Present Value Risk Free Rate 19 Coupon payment 20 RD Res RE 21 After Tax 22 23 Weighted Average Cost of Capital 24 Source Market Value Weight Cost Weighted Cost 25 Debt 26 Preferred 27 Equity 29 Total 30 WACC 31 Weighted Average Flotation Costs 32 Source Market Value Weight Flotation Costs Weighted Cost 33 Debt 0.00% 34 Preferred 0.00% 35 Equity 0.00% 36 37 Total 0.00% WAFC Cost of Capital Capital Budgeting | + + 60% Type here to search Howsex W 1 80 0 4 1 ENG 6:06 PM 11/16/2019Defense Electronics Worksheet-1 - Excel Sign in X File Home Insert Page Layout Formulas Data Review View Help Tell me what you want to do Share Online Pictures + Screenshot Get Add-ins b 12 A A T Equation . Shapes - Recommended PivotChart 3D Line Column Win/ Slicer Timeline Link Text Header 2 Symbol PivotTable Recommended Table Pictures PivotTables SmartArt My Add-ins Charts Map - Loss Box - & Footer Tables Illustrations Add-ins Charts Tours Sparklines Filters Links Text Symbols A8 X V fix Initial Cost of Land H s U V w AA | AB | AC /AD AE AF AG AH | A |A AL | AM | AN 1 Defense Electronics Capital Budgeting Weighted Average Flotation Costs 0.00% DATA FLOATATION COSTS life of project Cost of Plant 7,000,000 Increase in WC 1,300,000 Manufacturing Plant Amount Needed Amount Raised Flotation Costs Initial Cost of Land 4.400,000 Working Capital 9 Salvage value of land 4,800,000 Total 0 Life of machine in years 1 Depreciation This is the value that should be used for floatation costs on line 39. 12 Salvage value of machine 13 Book Value of machin 5, 100,000 14 Annual fixed costs .700,000 15 # RD's per year 15.300 16 selling price per RD 11,450 17 Variable cost per RD 9.500 18 Tax rate 32% 19 R (WACC from COC Shee 100% 20 21 Time 22 Working Capital 2 1 23 Change in working capital 24 25 Sales -Fixed Costs 27 -Variable Costs 28 -Depreciation 29 + Salvage Value 30 -Book Value 1 EBIT 32 - Ta 33 After Tax 34 +Depreciation 35 +Book Value 36 -CapEx 37 L 38 +Change in WC 39 -Flotation Costs Free Cash Flow 41 Discount 42 Present Value 43 44 NPV 45 IF Cost of Capital Capital Budgeting + + 50% Type here to search How sex W 1 8 GO ENG 6:06 PM 11/16/2019
