Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,...
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Suppose you have been hired as a financial consultant to Defense 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 five-year project. The company bought some land three years ago for $7.3 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. If the land were sold today, the net proceeds would be $7.76 million after taxes. In five years, the land will be worth $8.06 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.64 million to build. The following market data on DEI's securities are current: Debt: Common stock: 93,200 6.9 percent coupon bonds outstanding, 23 years to maturity, selling for 93.4 percent of par; the bonds have a $1,000 par value each and make semiannual payments. 1,800,000 shares outstanding, selling for $95.60 per share; the beta is 1.13. Preferred stock: 85,000 shares of 6.25 percent preferred stock outstanding, selling for $93.60 per share. Market: 6.95 percent expected market risk premium; 4.9 percent risk-free rate. DEI's tax rate is 21 percent. The project requires $905,000 in initial net working capital investment to get operational. a. Calculate the project's Time O cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) b. 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 +1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI's project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) < Prev 6 of 11 Next > Suppose you have been hired as a financial consultant to Defense 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 five-year project. The company bought some land three years ago for $7.3 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. If the land were sold today, the net proceeds would be $7.76 million after taxes. In five years, the land will be worth $8.06 million after taxes. The company wants to build its new manufacturing plant on this land; the plant will cost $13.64 million to build. The following market data on DEI's securities are current: Debt: Common stock: 93,200 6.9 percent coupon bonds outstanding, 23 years to maturity, selling for 93.4 percent of par; the bonds have a $1,000 par value each and make semiannual payments. 1,800,000 shares outstanding, selling for $95.60 per share; the beta is 1.13. Preferred stock: 85,000 shares of 6.25 percent preferred stock outstanding, selling for $93.60 per share. Market: 6.95 percent expected market risk premium; 4.9 percent risk-free rate. DEI's tax rate is 21 percent. The project requires $905,000 in initial net working capital investment to get operational. a. Calculate the project's Time O cash flow, taking into account all side effects. Assume that any NWC raised does not require floatation costs. (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) b. 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 +1 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating DEI's project. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) < Prev 6 of 11 Next >
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Defense Electronics Inc DEI Project Analysis Part a Time 0 Cash Flow Consider the following cash flo... View the full answer
Related Book For
Corporate Finance Core Principles and Applications
ISBN: 978-1259289903
5th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, Bradford Jordan
Posted Date:
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