For problems 1-6:
Your firm is considering expanding operations into Indi. The government there
has donated land if you build a plant there. The plant would cost roughly 20,000,000
$US. The plant could be depreciated on a 7-yr. MACRS schedule (weights:14.29%,
24.49%, 17.49%, 12.49%, 8.93%, 8.92%, 8.93%, 4.46%). The firm's marginal tax
rate is 36%. The operation is expected to generate the following number of units over
the coming years:
Year Number of Units
After the fourth year, unit production will be maintained at 350,000 per year. Variable costs are expected to be $28 per unit and the selling price is expected to be $41. Furthermore, production at this plant is expected to save the firm $50,000 per year in pre-tax expenses by producing the product there instead of in their current facilities.
Furthermore, the current stock price for the common shares outstanding is $29. The last dividend paid was $1.65, and has been growing at a constant 12% annually. Preferred shares are trading at $30 and pay a $4 dividend annually. The bonds of the firm are trading at 97.7% of par, have 14 years until maturity and a coupon rate of 12%. The capital structure, with assets financed with 30% debt, 60% common and 10% preferred is deemed optimal, and should remain constant in the future. The firm currently has no retained earnings available. All funds would need to be raised by issuing new common, preferred and debt. After incurring investment banking fees, the firm would receive $980 for each bond (and would mature in 25 years at a coupon set at current market rates for the old bonds), $28.5 on new preferred and $27.50 on new common stock issuance.
1. What is the relevant cost of debt to the firm if they undertake this project?
2. What is the cost of common equity if the project is undertaken?
3. What is the cost of preferred stock if the project is undertaken?
4. What would the appropriate discount rate be for this project - assuming it's
risk characteristics were identical to the rest of the firm's assets - and assuming the
firm maintains it's capital structure?
5. What are the relevant cash flows for this project?
6. Should the firm invest in the India project? WHY or WHY NOT?© BrainMass Inc. brainmass.com March 4, 2021, 6:25 pm ad1c9bdddf
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