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FINC302 Finance 322 Assignment 12 Please read each question carefully before answering. Other Instructions: Financial calculators and/or Excel may be used. Please show all work. If necessary, be sure to state any assumptions that you make. . 1. Consolidated Appliances is evaluating the possibility of adding a new model stove to their line of kitchen appliances. The company’s market research team estimates that first year sales of the new stove will be 60,000 units at the proposed price of $995.00 per unit. Direct materials and labor costs are estimated to be 45% of revenue, and associated selling, general and administrative expenses are estimated to be 30% of revenue. Unit sales are expected to grow 3% per year in each of the following 7 years, until the stove is discontinued at the end of year 8. The market research team also estimates the introduction of the new model will erode sales of the current top model by a constant 9,000 units per year. The current top model has a price of $1,295.00 and associated costs totaling 70% of revenue. The required tooling and machinery to manufacture the new model will cost a total of $25,000,000, and this will be depreciated on a straight-line basis over the eight-year life of the project to zero. The company expects to be able to sell the machinery at the end of the project for $3,000,000. There will also be fixed costs associated with the new model of $4,500,000 per year. The new model will require an increase in working capital of $1,350,000 which will be returned at the end of the project. Consolidated Appliances has a tax rate of 21%, and management believes that the discount rate for this project should be 15%. What is the NPV of this project? What is the IRR of this project? 2. Your company is considering the purchase of a new production system with an installed cost of $1,250,000. The cost will be depreciated on a straight-line basis to zero over the five-year life of the project, and the system can be sold at the end of the project for $225,000. It will provide additional revenue of $685,000 in the first year, and the additional revenue is expected to grow 5% per year thereafter. The associated cost of goods sold is estimated to be 30% of revenue, and other operating expenses are estimated to be 23% of revenue. The project will also require an initial working capital investment of $180,000, which will be recovered at the end of the project. If the tax rate is 21% and the required rate of return is 10%, what is the NPV of this project? 3. Wayne Industries currently has 50,000 of its 5% semi-annual coupon bonds outstanding (par value = 1000). The bonds will mature in 19 years and are currently priced at $1,120 per bond. The firm also has an issue of 1.5 million preferred shares outstanding with a market price of $30.00. The preferred shares offer an annual dividend of $2.40. Wayne Industries also has 4.5 million shares of common stock outstanding with a price of $17.50 per share. The firm is expected to pay a $1.20 common dividend 1 year from today, and that dividend is expected to increase by 5% per year forever. The firm typically pays floatation costs of 2% of the price on all newly issued securities. If the firm is subject to a 35% marginal tax rate, then what is the firm’s weighted average cost of capital? 4. Consolidated Appliances has a Beta of 0.85, the risk-free interest rate is 2.5%, and the equity risk premium is 5.5%. The yield to maturity on Consolidated Appliances debt is 4.65%. The company is financed 58% with equity, and 42% with debt, and has a tax rate of 21%. What is the WACC for consolidated Appliances? 5. You expect HyperNetworks free cash flow to grow at a constant rate of 3% from this year forward. The stock has a beta of 1.32, the risk-free rate is 2.5%, and the equity risk premium is 5.5%. Using this information, what should be the value of a share of HyperNetworks stock? 1Turn Over 4