You have been hired as a financial consultant to Defence 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 $5-$year project. The company bought some land $3$ years ago for $$3\mathrm{.}9$ million in anticipation of

using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the

chemicals instead. The land was appraised last week for $$4\mathrm{.}4$ million. In $5$ years, the land value

will be $$4\mathrm{.}8$ million, but the company expects to keep it for a future project. The company wants

to build its new manufacturing plant on this land; the plant will cost $$37$ million to build and

have $$5\mathrm{.}1$ million salvage value at the end of $5$ years. It will belong to CCA Class $43$ @ $30\%.$

The following market data on DEI's securities are current:

Debt: $210,0006\mathrm{.}4\%$ coupon bonds outstanding, $25$ years to maturity, selling for $108\%$ of par;

the bonds have a $$1,000$ par value each and make semi$-$annual payments.

Common stock: $8,300,000$ shares outstanding, selling for $$68$ per share with $1\mathrm{.}1$ beta.

Preferred stock: $450,000$ shares of $4\mathrm{.}5\%$ yield are outstanding, selling for $$81$ per share.

Market: $7\%$ expected market risk premium; $3\mathrm{.}5\%$ risk$-$free rate.

DEI uses G$.$M$.$ Wharton as its lead underwriter. Wharton charges DEI spreads of $8\%$ on new

common stock issues, $6\%$ on new preferred stock issues and $4\%$ on new debt issues. Wharton

has included all direct and indirect issuance costs $($along with its profit$)$ in setting these spreads.

Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new

shares of common stock. DEI's tax$-$rate is $35\%.$ The project requires $$1,200,000$ in initial net

working capital investment to get operational, which will be $90\%$ recovered at the end.

Required:

a$)$ Calculate the company$$s WACC based on both internal and external financing.

b$)$ Estimate the company$$s EBIT, FCF$,$ Net Income and EPS.

c$)$ The new RDS project is somewhat riskier than a typical project for DEI, primarily because

the plant is being located overseas. Management has told you to use an adjustment factor of

$12\%$ to account for this increased riskiness. Calculate the appropriate discount rate to use

when evaluating DEI's project and outline the factors increasing the riskiness.

d$)$ Assuming that the appropriate discount rate is $20\%,$ calculate the NPV of the opportunity if

the company will incur $$6,700,000$ in annual fixed costs, manufacturing $15,300$ RDSs per

year with the variable production costs of $$9,500$ per RDS$,$ and sell them at $$11,450$ per

machine. Based on NPV$,$ make a supported recommendation regarding the opportunity.

e$)$ Based on $$d$,$ calculate the minimum number of RDSs which must be sold annually in order

for DEI to break$-$even on the opportunity.

f$)$ If Both the Bonds and Preferred Stock can be called with $5\%$ premium, then should the

company call either or both of them?