The companys benchmark is the Wilshire 5000, which is expected to return 11% next year. 250,000 shares
Question:
The company’s benchmark is the Wilshire 5000, which is expected to return 11% next year.
250,000 shares of common stock are quoted today at $25, paying a dividend of $1.20 per share.
100,000 shares of preferred stock are quoted today at $45, paying a dividend of $2.50 per share.
The company is paying on a 20-year 4.75% loan issued 5 years ago with today’s principal =$2,750,000
Two bonds are outstanding:
1) The company has 2,000 bonds with 20-year outstanding, issued 5 years ago with a coupon rate of 4.25% with today’s market rate = 3.75%.
2) The company has 2,500 bonds with 15-year outstanding, issued 3 years ago with a coupon rate of 3.88% with today’s market rate = 3.6%.
Companies estimate their return on equity is 12%
Initial Investment = $5,000,000
Taxes = 35%
Beta = 1.27
T note = 2.4%
Dividends paid = $1,000,000 with a payout ratio of 33%.
Estimated sales are: $2,500,000 for year 1, $4,000,000 for year 2, $7,000,000 for year 3, $6,000,000 for years 4 & 5, $4,000,000 for year 6, and $1,500,000 with a sale of the asset in year 7 for $250,000.
Variables costs are 52%
Fixed costs = $400,000 per year
Required: Should we proceed with this project?
Managerial Economics
ISBN: 978-0133020267
7th edition
Authors: Paul Keat, Philip K Young, Steve Erfle