Hi :) i need help with this. Thank you :) Quantitative Problem: Barton Industrie
ID: 2738623 • Letter: H
Question
Hi :) i need help with this. Thank you :)
Quantitative Problem:
Barton Industries expects next year's annual dividend, D1, to be $2.30 and it expects dividends to grow at a constant rate g = 4.6%. The firm's current common stock price, P0, is $20.50. If it needs to issue new common stock, the firm will encounter a 4.9% flotation cost, F. Assume that the cost of equity calculated without the flotation adjustment is 12% and the cost of old common equity is 11.5%. What is the flotation cost adjustment that must be added to its cost of retained earnings? Round your answer to 2 decimal places. Do not round intermediate calculations
%
What is the cost of new common equity considering the estimate made from the three estimation methodologies? Round your answer to 2 decimal places. Do not round intermediate calculations.
%
Quantitative Problem:
Sunshine Smoothies Company (SSC) manufactures and distributes smoothies. SSC is considering the development of a new line of high-protein energy smoothies. SSC's CFO has collected the following information regarding the proposed project, which is expected to last 3 years:
The project can be operated at the company's Charleston plant, which is currently vacant.
The project will require that the company spend $3.5 million today (t = 0) to purchase additional equipment. For tax purposes the equipment will be depreciated on a straight-line basis over 5 years. Thus, the firm's annual depreciation expense is $3,500,000/5 = $700,000. The company plans to use the equipment for all 3 years of the project. At t = 3 (which is the project's last year of operation), the equipment is expected to be sold for $1,600,000 before taxes.
The project will require an increase in net operating working capital of $730,000 at t = 0. The cost of the working capital will be fully recovered at t = 3 (which is the project's last year of operation).
Expected high-protein energy smoothie sales are as follows:
The project's annual operating costs (excluding depreciation) are expected to be 60% of sales.
The company's tax rate is 40%.
The company is extremely profitable; so if any losses are incurred from the high-protein energy smoothie project they can be used to partially offset taxes paid on the company's other projects. (That is, assume that if there are any tax credits related to this project they can be used in the year they occur.)
The project has a WACC = 10.0%.
What is the project's expected NPV and IRR? Round your answers to 2 decimal places. Do not round your intermediate calculations.
Year Sales 1 $2,000,000 2 7,550,000 3 3,400,000Explanation / Answer
Calculate the NPV:
Year
Cash flows
Discounting
factor @10%
Discounting
cash flows
0
$ (3,500,000)
1.00000
$ (3,500,000)
1
$ 800,000
0.90909
$ 727,272
2
$ 3,020,000
0.82645
$ 2,495,879
3
$ 2,960,000
0.75131
$ 2,223,878
NPV
$ 1,947,029
Note:
In 3rd year include $1,360,000 + $1,600,000.
Cash flows consider 40% of sales.
Calculate the IRR:
Year
Cash flows
0
$ (3,500,000)
1
$ 800,000
2
$ 3,020,000
3
$ 2,960,000
Net cash flow
$ 3,280,000
Using financial calculator IRR is 34.159%.
Note: Assume only consider cash outflow and profit (40%) considered.
Year
Cash flows
Discounting
factor @10%
Discounting
cash flows
0
$ (3,500,000)
1.00000
$ (3,500,000)
1
$ 800,000
0.90909
$ 727,272
2
$ 3,020,000
0.82645
$ 2,495,879
3
$ 2,960,000
0.75131
$ 2,223,878
NPV
$ 1,947,029