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You are the financial manager for a company in defense industry.




You are the financial manager for a company in defense industry. The firm is planning on establishing a plant overseas to produce a new line of products. The project will last for 5 years. The company bought land 6 years ago for 4 million dollars. The fair market value of the land today is 5.1 million dollars. The after tax value of the land after 5 years is $6 million, but the company is not planning to sell then. They will keep it for a future project. The cost of the plant and equipment is $35 million.;Currently, the firm has the following securities;1. Debt: 240,000 bonds with 7.5% coupon rate outstanding, 20 years maturity, sold at 94% of par, the par value is $1,000 and make semiannual payments.;2. Common Stocks: 9,000,000 stocks, selling for $71/stock, with beta 1.2;3. Preferred stocks: 400,000 stocks at 5.5% and currently selling for $81;The market risk premium is 8% and 5% is the risk-free rate. Tax rate is 35% and the project requires $1,300,000 of initial net working capital.;a. Calculate the project initial cash flow CF0;b. The new project is somewhat riskier than a typical project for the firm, since it is overseas. So you are going to use a +3 adjustment factor to account for this increase risk. Calculate the appropriate discount rate that the firm should use when evaluating the project.;c. The firm will incur $7 million in fixed cost annually. They will produce 18,000 unites annually and sell each for $10,900. The variable cost is 9,400/unit. What is the annual OCF from this project?;d. What is the project NPV and IRR?;Additional Requirements;Level of Detail: Show all work


Paper#29913 | Written in 18-Jul-2015

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