The Wrought Sisters Company (WSC) produces foam model airplanes for the hobby industry. WSC has managed...

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The Wrought Sisters Company (WSC) produces foam model airplanes for the hobby industry. WSC has managed to be debt free to date. There are 100,000 ordinary shares outstanding, with a market capitalization of $2 million. Equity holders require a return of 10 percent on their investment. WSC intends to diversify by manufacturing a new line of balsa wood model airplanes. This venture will not raise the risk level of the company. The equipment to make such airplanes cost $12,000, which will be the depreciable base. WSC uses straight-line depreciation for its non-current assets. The equipment is expected to last 3 years, at which time the equipment will be sold for $2,000 (after tax). The expected demand is 1,000 balsa airplanes per year. Each new airplane will be priced at $20 in the first year and thereafter rise at 5 percent per year. Total variable costs are expected to be $4 per airplane. The corporate tax is at 15 percent. Required: 1. Compute the value added to the company if it diversifies. 2. What is the price per share of WSC if the new investment is undertaken? Make a reasoned recommendation on the new investment. The Wrought Sisters Company (WSC) produces foam model airplanes for the hobby industry. WSC has managed to be debt free to date. There are 100,000 ordinary shares outstanding, with a market capitalization of $2 million. Equity holders require a return of 10 percent on their investment. WSC intends to diversify by manufacturing a new line of balsa wood model airplanes. This venture will not raise the risk level of the company. The equipment to make such airplanes cost $12,000, which will be the depreciable base. WSC uses straight-line depreciation for its non-current assets. The equipment is expected to last 3 years, at which time the equipment will be sold for $2,000 (after tax). The expected demand is 1,000 balsa airplanes per year. Each new airplane will be priced at $20 in the first year and thereafter rise at 5 percent per year. Total variable costs are expected to be $4 per airplane. The corporate tax is at 15 percent. Required: 1. Compute the value added to the company if it diversifies. 2. What is the price per share of WSC if the new investment is undertaken? Make a reasoned recommendation on the new investment.

Answer rating: 100% (QA)

To compute the value added to the company if it diversifies we need to calculate the net present val... View the full answer