Assuming that Ideko\'s market share after 2005 will increase each year, the requ

ID: 2794757 • Letter: A

Question

Assuming that Ideko's market share after 2005 will increase each year, the required production volume for the following five years are shown here:

4.75%

Ideko's production plant will require an expansion in 2010 (when production volume will exceed the current level by 50%), and the cost of this expansion will be $15.7 million. Assuming the financing of the expansion will be delayedaccordingly, calculate the projected interest payments and the amount of the projected interest tax shields (assuming that the interest rates on the term loans is 7.3%) through 2010. Consider an income tax rate of 35%. Ideko's balance sheet for 2005 is shown here:

Round to the nearest $000

Outstanding Debt

Sales Data Growth/Year 2005 2006 2007 2008 2009 2010 Market Size (000 units)

4.75%

10,200.0 10,684.5 11,192.0 1,1723.6 12,280.5 12,863.8 Market Share 0.55% 10.30% 10.85% 11.40% 11.95% 12.50% 13.05% Production Volume (000 units) 1,050.6 1,159.3 1,275.9 1,401.0 1,535.1 1,678.7

Explanation / Answer

Calculation of projected interest payment and tax shield on interest

Interest on Term Loan 7.3%

nterest Tax Sheild(@35)

6716

2351

7206

2522

7732

2706

8297

2904

8902

3116

10698

3744

*121951+8902+15700=$146553(000)

Debt and interest ($000) 2005 2006 2007 2008 2009 2010 Outstanding Debt 92000 98716 105922 113654 121951 146553