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Quinton Johnston is evaluating NYL Manufacturing Company, Ltd. In 2017, when Johnston is performing his analysis, the company is unprofitable. Furthermore, NYL pays no dividends on its common shares. Johnston decides to value NYL Manufacturing by using his forecasts of FCFE. Johnston gathers the following facts and assumptions: ● The company has 17.0 billion shares outstanding. ● Sales will be R5.5 billion in 2018, increasing at 28 percent annually for the next four years (through 2022). ● Net income will be 32 percent of sales. ● Investment in fixed assets will be 35 percent of sales; investment in working capital will be 6 percent of sales; depreciation will be 9 percent of sales. ● 20 percent of the net investment in assets will be financed with debt. ● Interest expenses will be only 2 percent of sales. ● The tax rate will be 10 percent. NYL Manufacturing’s beta is 2.1; the risk-free government bond rate is 6.4 percent; the equity risk premium is 5.0 percent. ● At the end of 2022, Johnston projects NYL terminal stock value at 18 times earnings. What is the value of one ordinary share of NYL Manufacturing Company?

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This is a comprehensive project evaluation problem bringing together much of what you have learned so far. Company ABC is a large publicly traded firm, a market leader in producing selfdriving agricultural machines. The company is looking at setting up a manufacturing plant overseas to produce a new line of self-driving tractors. This will be a four-year project. The plant and equipment will cost $100 million to build. The market data on ABC’s securities is following: Debt: 550,000 5.6 percent coupon bonds outstanding, 20 years to maturity, selling for 108 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 22,000,000 shares outstanding, selling for $56 per share; the beta is 1.1. Preferred stock: 1,200,000 shares of 5 percent preferred stock outstanding, selling for $85 per share. Market: 7 percent expected market risk premium; 3 percent risk-free rate. ABC faces 8 percent floatation costs of new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. ABC’s tax rate is 35 percent. The project requires $5,5 million in initial net working capital investment to get operational. a. Calculate the weighted average of floatation costs and use this to adjust your initial investment. b. The new project is somewhat riskier than a typical project for ABC, primarily because the plant is being located overseas. Management has decided to use adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating ABC’s project (start by calculating WACC). c. The manufacturing plant has a four-year tax life, and ABC uses straight-line depreciation. At the end of the project (that is, the end of Year 4), the plant and equipment can be scrapped for $20 million. What is the aftertax salvage value of this plant and equipment? d. The company will incur $16 million in annual fixed costs. The plan is to manufacture 2,000 tractors per year and sell them at $110,000 per machine; the variable production costs are $75,000 per tractor. Confirm that annual operating cash flows (OCF) from this project are $43.85 million. e. Confirm that the last year’s (year 4) total cash flow from assets is $62.35 million (don’t forget to add in the net working capital and after tax salvage value). f. Given the following total cash flows of years 0-4: -112,637,300; 43,850,000; 43,850,000; 43,850,000; and 62,350,000 what is the project’s internal rate of return (IRR) and net present value (NPV). Would you recommend to invest into this project?

Company ABC is a large publicly traded firm, a market leader in producing selfdriving agricultural machines. The company is looking at setting up a manufacturing plant overseas to produce a new line of self-driving tractors. This will be a four-year project. The plant and equipment will cost $100 million to build. The market data on ABC’s securities is following:

Debt: 550,000 5.6 percent coupon bonds outstanding, 20 years to maturity, selling for 108 percent of par; the bonds have a $1,000 par value each and make semiannual payments.

Common stock: 22,000,000 shares outstanding, selling for $56 per share; the beta is 1.1.

Preferred stock: 1,200,000 shares of 5 percent preferred stock outstanding, selling for $85 per share.

Market: 7 percent expected market risk premium; 3 percent risk-free rate.

ABC faces 8 percent floatation costs of new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. ABC’s tax rate is 35 percent. The project requires $5,5 million in initial net working capital investment to get operational.

A. Calculate the weighted average of floatation costs and use this to adjust your initial investment.

B. The new project is somewhat riskier than a typical project for ABC, primarily because the plant is being located overseas. Management has decided to use adjustment factor of +2 percent to account for this increased riskiness. Calculate the appropriate discount rate to use when evaluating ABC’s project (start by calculating WACC).

C. The manufacturing plant has a four-year tax life, and ABC uses straight-line depreciation. At the end of the project (that is, the end of Year 4), the plant and equipment can be scrapped for $20 million. What is the aftertax salvage value of this plant and equipment?

D. The company will incur $16 million in annual fixed costs. The plan is to manufacture 2,000 tractors per year and sell them at $110,000 per machine; the variable production costs are $75,000 per tractor. Confirm that annual operating cash flows (OCF) from this project are $43.85 million.

E.. Confirm that the last year’s (year 4) total cash flow from assets is $62.35 million (don’t forget to add in the net working capital and after tax salvage value).

F. Given the following total cash flows of years 0-4: -112,637,300; 43,850,000; 43,850,000; 43,850,000; and 62,350,000 what is the project’s internal rate of return (IRR) and net present value (NPV). Would you recommend to invest into this project?

FRL 301 – Chapter 14 Assignment 1 – 4/27/17 Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large, publicly traded firm that is the market share leader in radar detection systems (RDSs). The company is looking at setting up a manufacturing plant overseas to produce a new line of RDSs. This will be a five-year project. The company bought some land three years ago for $4.2 million in anticipation of using it as a toxic dump site for waste chemicals, but it built a piping system to safely discard the chemicals instead. The land was appraised last week for $4.5 million. In five years, the aftertax value of the land will be $5.0 million, but the company expects to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant and equipment will cost $32.00 million to build. The following market data on DEI’s securities are current: Debt: 225,000 7.5 percent coupon bonds outstanding, 25 years to maturity, selling for 108 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 8,400,000 shares outstanding, selling for $70.80 per share; the beta is 1.3. Preferred stock: 445,000 shares of 6 percent preferred stock outstanding, selling for $80.80 per share. Market: 8 percent expected market risk premium; 5 percent risk-free rate. DEI uses G.M. Wharton as its lead underwriter. Wharton charges DEI spreads of 9 percent on new common stock issues, 6 percent on new preferred stock issues, and 4 percent on new debt issues. Wharton has included all direct and indirect issuance costs (along with its profit) in setting these spreads. Wharton has recommended to DEI that it raise the funds needed to build the plant by issuing new shares of common stock. DEI’s tax rate is 35 percent. The project requires $1,300,000 in initial net working capital investment to get operational. Assume Wharton raises all equity for new projects externally and that the NWC does not require floatation costs

Problem 1 Based on market values of debt and equity, calculate the percentage of DEI’s market value that is held in common stock, preferred stock, and debt.

Problem 2 Calculate DEI’s weighted average cost of capital (WACC).

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