You have determined that the project is within the typical line of business and has the same risk as the corporation. What is the NPV for this project?
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Smith Steel Works 2020 Income Statement Smith Steel Works Common Stock Data 2020 Current Price per share Shares Outstanding Last Dividend per share Earnings per share $ Expected dividend growth $24.00 100,000 1.5 3.00 10.00% Net Sales Cost of Goods Sold Depreciation EBIT Interest Paid Taxable income Taxes (40% MTR) Net Income $3,000,000 $2,000,000 $300,000 $700,000 $200,000 $500,000 $200,000 $300,000 2000 Bond Data Bonds Outstanding Term to maturity (years) Par value per bond Annual Coupon rate Payment frequency Market price per bond Dividends Paid $150,000 8 $1,000.00 10.00% semi-annual $1,200.00 Smith Steel Works 2019 and 2020 Balance Sheet Cash Accounts Receivable Assets 2019 $160,000 $400,000 $320,000 $880,000 2020 $190,000 $450,000 $360,000 $1,000,000 Liabilities and Owner's Equity 2019 Accounts Payable $310,000 Notes Payable $220,000 Current Liabilities $530,000 2020 $350,000 $250,000 $600,000 Inventory Current Assets Long Term Debt Total Liabilities $1,800,000 $2,330,000 $2,000,000 $2,600,000 Net Fixed Assets $2,700,000 $3,000,000 Common Stock Retained Earnings Total Owner's Equity $1,000,000 $250,000 $1,250,000 $1,000,000 $400,000 $1,400,000 Total Assets $3,580,000 $4,000,000 Total Liab. & OE $3,580,000 $4,000,000 Industry Data 2020: ROE = PM XTAT X EM ROE = 10% x 1 x 1.529 = 15.29% Inventory Period = 45 Accounts Receivable Period = 60 Payables Period = 60 For Smith Steel Works calculate the following: What is the cost of Debt (RD)? N 1/Y PV PMT number of periods Interest per year Present value Payment Future value 16 3.36% -1200 50 1000 Cost of debt = 6.73% FV What is the cost of Equity (Re)? 16.88% D.(1+g) Re= +9 P. What is the capital structure weight of equity (we)? = long term debt = $2,400,000.00 Common stock RE = $2,400,000.00 $400,000 $2,800,000.00 Total equity Total D&E Il $5,200,000.00 Weight of equity = 53.85% What is the capital structure weight of debt (WD)? 46.15% What is the WACC for this firm, if the corporate tax rate is 40%? (weight of debt * cost of debt) * (1 - Tax rate) + weight of equity * cost of equity 10.95% Smith Steel Works is deciding on a new project. Use the following information for the project evaluation and analysis: - The initial costs are $1,500,000 for fixed assets. The fied assets will be depreciated straight line to a zero book value over the 3 year life of the project. The fixed assets have an estimated salvage value of $300,000 at the end of the project. The project also requires an additional $300,000 for net working capital. All of the net working capital will be recouped at the end of the 3 years. The project is expected to generate sales of $2,600,000 (2,600 units at a sales price of $1,000/unit), incur variable cost of $550 per unit and fixed costs of $500,000 per year. The firm's marginal tax rate is 40 percent. What is the Operating Cash Flow for each year of the project? OCF = (Sales (total variable and fixed costs)) x (1 T) + Depreciation x T OCF = (2,600,000 ((2600*550) +500,000)x(1 -0.4) +(1,500,000/3)x0.4 OCF = $ 602,000.00 What is the after-tax salvage value at the end of this project? $ 180,000.00 What are the Cash Flows from Assets each year for this project? 0 1 2 3 Year OCF ANWC 602,000.00 602,000.00 602,000.00 300,000.00 (300,000.00) NCS CFFA (1,500,000) (1,800,000) 180,000.00 1,082,000 602,000 602,000 You have determined that the project is within the typical line of business and has the same risk as the corporation. What is the NPV for this project? What is the IRR? What other calclations would you recommend that Smith Steel Works perform and analyze when determining whether to move forward with this project? What is your recommendation to Smith Steel Works on this project? Why
