One of the points of discussion between management and its consultants is the choice of the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
One of the points of discussion between management and its consultants is the choice of the discount rate for this capital budgeting exercise. It was finally decided that the discount rate would be the company's WACC. Currently all of Highland's assets are exclusively financed by common equity and long-term debt (bonds). The company's balance sheet shows the following values: Bonds: $100,000,000 Common Equity: Paid-in Capital: Retained Earnings: $35,000,000 $ 9,000,000 Bonds: In early January 2010, the company issued 100,000 20-year non-callable bonds with an 8% coupon paid semi-annually, at a$1,000 par value. They currently trade at $1,150. This is the only bond issue the company has made to date. Common equity: Highland Beverages went public in 2005 and issued 1,000,000 shares at $35 each. It has not issued any new stock since then, nor has it repurchased any of its issued stock. The Highland stock currently trades at $54. Currently, the yield on US Treasury bonds is 3.5%, and the required return for a well-diversified stock portfolio is 9%. Highland Beverages' beta is estimated at 1.15. Highland Beverages' marginal tax rate is 40%. Questions: 1) What are the relevant cash flows to consider for this project relative to the old plant? (Hint: use a timeline) 2) What are the relevant cash flows to consider for this project relative to the new plant? (Hint: same as above) 3) Calculate the proper discount rate to use for this project (2 decimals)? 4) What are the NPV and IRR of this project as of today, January 1st 2015? 5) Based on all the assumptions and on your calculations, should the company proceed with the new plant? Explain. 6) Aside from projected revenue and expense timing and amounts, tax considerations, or market data, which assumption could be easily changed that would probably modify your answer in 4) and 5)? Note: As usual, you must show all your step-by-step calculations along with all necessary written explanations showing the logical process by which you reach your answers. You will be graded based not only the accuracy of your numbers, but also on the logic and the clarity of your explanations, as you work your way toward your final answers. One of the points of discussion between management and its consultants is the choice of the discount rate for this capital budgeting exercise. It was finally decided that the discount rate would be the company's WACC. Currently all of Highland's assets are exclusively financed by common equity and long-term debt (bonds). The company's balance sheet shows the following values: Bonds: $100,000,000 Common Equity: Paid-in Capital: Retained Earnings: $35,000,000 $ 9,000,000 Bonds: In early January 2010, the company issued 100,000 20-year non-callable bonds with an 8% coupon paid semi-annually, at a$1,000 par value. They currently trade at $1,150. This is the only bond issue the company has made to date. Common equity: Highland Beverages went public in 2005 and issued 1,000,000 shares at $35 each. It has not issued any new stock since then, nor has it repurchased any of its issued stock. The Highland stock currently trades at $54. Currently, the yield on US Treasury bonds is 3.5%, and the required return for a well-diversified stock portfolio is 9%. Highland Beverages' beta is estimated at 1.15. Highland Beverages' marginal tax rate is 40%. Questions: 1) What are the relevant cash flows to consider for this project relative to the old plant? (Hint: use a timeline) 2) What are the relevant cash flows to consider for this project relative to the new plant? (Hint: same as above) 3) Calculate the proper discount rate to use for this project (2 decimals)? 4) What are the NPV and IRR of this project as of today, January 1st 2015? 5) Based on all the assumptions and on your calculations, should the company proceed with the new plant? Explain. 6) Aside from projected revenue and expense timing and amounts, tax considerations, or market data, which assumption could be easily changed that would probably modify your answer in 4) and 5)? Note: As usual, you must show all your step-by-step calculations along with all necessary written explanations showing the logical process by which you reach your answers. You will be graded based not only the accuracy of your numbers, but also on the logic and the clarity of your explanations, as you work your way toward your final answers.
Expert Answer:
Answer rating: 100% (QA)
To evaluate the capital budgeting exercise for Highland Beverages we need to calculate the relevant cash flows and perform the necessary financial ana... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
Students also viewed these finance questions
-
Highland Beverages is a soft drink manufacturing company based in Wimberley, TX, specialized in the production and distribution of all-natural fruit-flavored sparkling beverages. It is considering...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Read the case study "Southwest Airlines," found in Part 2 of your textbook. Review the "Guide to Case Analysis" found on pp. CA1 - CA11 of your textbook. (This guide follows the last case in the...
-
Concentric shells r = 20 cm and r = 30 cm are held at V = 0 and V = 50, respectively. If the space between them is filled with dielectric material ( = 3.10, a = 1012 S/m), find: (a) V, E, and D, (b)...
-
Suppose reflected white light is used to observe a thin, transparent coating on glass as the coating material is gradually deposited by evaporation in a vacuum. Describe some color changes that might...
-
Find the amplitude of the surface pressure coefficient for a flat plate simple harmonically oscillating in hypersonic flow with amplitude \(\bar{h}\). Define an interval for the hypersonic similarity...
-
Omaha Steaks is a food retailing company that specializes in mail order delivery of beef. The company is headquartered in Omaha Nebraska and was founded as a butcher shop in 1917. Omaha Steaks wants...
-
In what ways was Anderson a transformational leader in order to execute his strategy for Best Buy, how did he combine transformational with transactional leadership? In what ways did Anderson exhibit...
-
What are mashups? How do they enable social media applications? 5-4. How can social software help harness the wisdom of the crowd? 5-6. How can social software enhance communication? 5-8. What is a...
-
The COVID-19 pandemic affected companies in the food industry in unique ways, particularly during 2020. Ruth's Hospitality Group (Ticker: RUTH) develops and operates fine dining restaurants under the...
-
In what ways can strategic foresight methodologies, such as horizon scanning or trend analysis, inform strategic planning processes by identifying emerging opportunities, disruptive threats, and...
-
Assume the short-run aggregate supply curve can be expressed algebraically as where Y d is aggregate demand. Find the numerical values for equilibrium output, Y, and the equilibrium inflation rate, ,...
-
Suppose the central bank took advantage of a temporary positive supply shock to lower its inflation target. Illustrate the impact of this change in the inflation target using an aggregate...
-
Working in a small group, collect credit card marketing information or the summary of account information sent to cardholders for three to five different cards. Be sure to protect the identity of the...
-
To learn more about making automatic investments, research the options offered by different brokerage firms or mutual fund companies. Specifically, determine the required minimum monthly contribution...
-
It is commonly assumed that the older a person gets, the less risk tolerant he or she becomes. Why might this be a standard assumption, and do you believe this assumption? Interview several retired...
-
As you have from module minimum wage rates have not increased in over a decade. As of 2019, the federal government will not offer contracts to companies who pay lower than $10.60/hour. Minimum wage...
-
For a Poisson process of rate , the Bernoulli arrival approximation assumes that in any very small interval of length , there is either 0 arrivals with probability 1- or 1 arrival with probability ....
-
Explain the role of financial intermediaries in the flow of funds through the three-sector economy.
-
Given the following information, calculate the weighted average cost of capital for Genex Corporation. Line up the calculations in the order shown in Table 11-1. Percent of capital structure:...
-
Applied Software has a $1 ,000 par value bond outstanding that pays 12 percent interest with annual payments. The current yield to maturity on such bonds in the market is 7 percent. Compute the price...
-
A faculty member wishes to assess the relationship between students' scores on the Scholastic Aptitude test (SAT) and their performance in college. a. What is a possible research hypothesis in this...
-
Name the scale of measurement (nominal, ordinal, interval, ratio) for each of the following variables: a. One's age (in years) b. Size of soft drink (small, medium, large, extra large) c. Voting...
-
Name the scale of measurement (nominal, ordinal, interval, ratio) for each of the following variables: a. The amount of time needed to react to a sound b. Gender c. Score on the Scholastic Aptitude...
Study smarter with the SolutionInn App