December 2018, The Shoe Company was considering the addition of a new plant Currently, the Shoe...

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December 2018, The Shoe Company was considering the addition of a new plant Currently, the Shoe Company uses a competitor to process their shoes to be sold as elegant shoes. The addition would have two primary benefits: to eliminate the need to have processing done by another company and produce additional shoe products like sandals and flats. The new processing plant would allow the Shoe Company to reduce its operating cost and increase revenues by selling different products. The projected would start at the beginning of 2019 and would cost a total of $16 million, $15 million in 2019 and an additional cost of $1 million in 2020. The depreciation of the plant would begin in 2020 using a straight-line basis for 20 years. The plant would begin operations in 2020 and provide savings of $2 million in 2020 and then $3 million (per year) of savings for the next 9 years. The new plant would also increase revenue by $2.5 million in 2020 and then $5 million (per year) for the next 9 years. It is expected that the Cost of Goods Sold would be 60% of the sales and General Admin costs would be 10% of sales. Due to the increase in revenue, working capital will also need to increase, representing 10% of incremental revenue. At the end of the project in 2029, they could sell the plant and equipment for approximately 20% (ignore taxes) of what the cost is. At this point, they would also recover their working capital investment. Shoe Company has a tax rate of 40%. They are currently using a weighted average cost of capital of 15%, which has been used for the past 10 years. The company did not include inflation in the savings and revenue numbers, estimated at 2%. Information: Interest Rates Government Bonds= 10-Year 4% Market Risk Premium= 5.5% Corporate Bonds (10 year maturities) AAA - 6.0% AA - 6.5% A-6.7% Financial Data Balance Sheet Accts Long term debt= $2,000,000 Common Equity= $400,000 Retained Earnings= $2,200,000 Per share Data Shares outstanding = 500,000 Book value per share= $5.50 Recent Market value per share = $12.00 Other info: abond Rating = A Beta 1.20 Help Needed= 1.What are possible Risks with the project? 2. what issues need to be adressed? 3. Explain the Numbers used to arriving at the new WACC. 4. Explain consequences of using the old WACC of 15% December 2018, The Shoe Company was considering the addition of a new plant Currently, the Shoe Company uses a competitor to process their shoes to be sold as elegant shoes. The addition would have two primary benefits: to eliminate the need to have processing done by another company and produce additional shoe products like sandals and flats. The new processing plant would allow the Shoe Company to reduce its operating cost and increase revenues by selling different products. The projected would start at the beginning of 2019 and would cost a total of $16 million, $15 million in 2019 and an additional cost of $1 million in 2020. The depreciation of the plant would begin in 2020 using a straight-line basis for 20 years. The plant would begin operations in 2020 and provide savings of $2 million in 2020 and then $3 million (per year) of savings for the next 9 years. The new plant would also increase revenue by $2.5 million in 2020 and then $5 million (per year) for the next 9 years. It is expected that the Cost of Goods Sold would be 60% of the sales and General Admin costs would be 10% of sales. Due to the increase in revenue, working capital will also need to increase, representing 10% of incremental revenue. At the end of the project in 2029, they could sell the plant and equipment for approximately 20% (ignore taxes) of what the cost is. At this point, they would also recover their working capital investment. Shoe Company has a tax rate of 40%. They are currently using a weighted average cost of capital of 15%, which has been used for the past 10 years. The company did not include inflation in the savings and revenue numbers, estimated at 2%. Information: Interest Rates Government Bonds= 10-Year 4% Market Risk Premium= 5.5% Corporate Bonds (10 year maturities) AAA - 6.0% AA - 6.5% A-6.7% Financial Data Balance Sheet Accts Long term debt= $2,000,000 Common Equity= $400,000 Retained Earnings= $2,200,000 Per share Data Shares outstanding = 500,000 Book value per share= $5.50 Recent Market value per share = $12.00 Other info: abond Rating = A Beta 1.20 Help Needed= 1.What are possible Risks with the project? 2. what issues need to be adressed? 3. Explain the Numbers used to arriving at the new WACC. 4. Explain consequences of using the old WACC of 15%

Answer rating: 100% (QA)

Possible Risks with the Project Market Risk Demand for sandals and flats may be lower than anticipated leading to excess inventory and reduced revenue ... View the full answer