As the Financial Manager of Technodrone Ltd, you are requested by the Board of Directors to evaluate
Question:
As the Financial Manager of Technodrone Ltd, you are requested by the Board of Directors to evaluate the investment opportunities for the business and analyse financing via a bond issue. The company has the following information,
Capital Structure:
The company is currently funded for each source of capital and relevant specific cost of capital are as follows:
| Type of Financing | Market Value | Specific cost |
| Debt (Long Term) | $3,500,000 | 8.5% |
| Ordinary Share Capital | $1,500,000 | 11.0% |
| Preference Share Capital | $ 350,000 | 12.0% |
Note the company tax rate is 30%
Proposed Capital Investment Project
The proposed planned expansion into new markets would require manufacturing plants being set up in various states, in this regard the production team are attempting to select the better of two mutually exclusive projects. The initial investment and after-tax cash inflows associated with these projects are shown in the following table:
| Cash flows | Project X | Project Y |
| Initial investment (CF 0) | $400,000 | $300,000 |
| Cash inflows (CFt), t1 to 5 | $75,000 | $ 60,000 |
Proposed Bond issue and valuation
The planned expansion into new markets in the next financial year would require considerable cash, in this regard the company is planning to issue 5-year bonds with a face value of $1,000 and coupon rate of 8%. The going market rate for such bonds is 6%. Assume that coupon payments will be annual,and the company needs to raise $400,000.
| You are required to: | |
[Answer and show workings here] |
- Calculate the price and number of bonds to be issued to achieve the necessary investment (Assume $400,000) in the projects.
[Answer and show workings here]
- Calculate the NPV and payback for the capital investment projects X & Y.
[Answer and show workings here]
Expert Answer:
Weighted Average Cost of Capital WACC Calculation WACC EV Ke DV Kd 1 Tc Where E Market value of Equity V Total market value of capital E D Ke Cost of ... View the full answer
