Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

WinterWorld Productions is assessing capital investment. Their current capital structure consists of $1,000,000 in bonds with 15 years to maturity that have a coupon rate

WinterWorld Productions is assessing capital investment. Their current capital structure consists of $1,000,000 in bonds with 15 years to maturity that have a coupon rate of 5.6% paid semi-annually. The bond sold for $1010, had flotation costs of $20, Par $1000. Their tax rate is 40%. Their equity structure consists of 50,000 shares of stock at $60 per share. Beta is .95, the market return is 11%, the risk-free rate is 3%.

The investment will entail a new machine costing $260,000 with $10,000 of NWC needed to start. If they do not go forward with this project they can rent out space for $50,000. The machine can be sold at the end of the 5-year project for $60,000. MACRS 5 years will be used. The expected annual unit sales are 3,000/5,000/6,000/4,000/2,000. The selling price is $50 with an increase of 5% per year after year 1. Operating costs are $32 with an increase of 5% per year after year 1. The financial analyst for this project is new and risk-averse and will use 9% for the WACC rather than their actual cost of capital.

  1. What is year 1 OCF?

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

An Introduction To Financial Markets A Quantitative Approach

Authors: Paolo Brandimarte

1st Edition

1118014774, 9781118014776

More Books

Students also viewed these Finance questions