# Financial Management

posted by .

Company Information
Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of \$1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It is estimated that the project will generate additional revenues of \$1.2 million per year before tax and has additional annual costs of \$600,000. The Marginal Tax rate is 35%.
Required:
Wheel has just paid a dividend of \$2.50 per share. The dividends are expected to grow at a constant rate of six percent per year forever. If the stock is currently selling for \$50 per share with a 10% flotation cost, what is the cost of new equity for the firm? What are the advantages and disadvantages of using this type of financing for the firm?

The firm is considering using debt in its capital structure. If the market rate of 5% is appropriate for debt of this kind, what is the after tax cost of debt for the company? What are the advantages and disadvantages of using this type of financing for the firm?

The firm has decided on a capital structure consisting of 30% debt and 70% new common stock. Calculate the WACC and explain how it is used in the capital budgeting process.

Calculate the after tax cash flows for the project for each year. Explain the methods used in your calculations.

If the discount rate were 6 percent calculate the NPV of the project. Is this an economically acceptable project to undertake? Why or why not?

Now calculate the IRR for the project. Is this an acceptable project? Why or why not? Is there a conflict between your answer to part C? Explain why or why not?

Wheel has two other possible investment opportunities, which are mutually exclusive, and independent of Investment A above. Both investments will cost \$120,000 and have a life of 6 years. The after tax cash flows are expected to be the same over the six year life for both projects, and the probabilities for each year's after tax cash flow is given in the table below.
Investment B Investment C
Probability After Tax
Cash Flow Probability After Tax
Cash Flow
0.25 \$20,000 0.30 \$22,000
0.50 32,000 0.50 40,000
0.25 40,000 0.20 50,000

What is the expected value of each projectâ€™s annual after tax cash flow? Justify your answers and identify any conflicts between the IRR and the NPV and explain why these conflicts may occur.

Assuming that the appropriate discount rate for projects of this risk level is 8%, what is the risk-adjusted NPV for each project? Which project, if either, should be selected? Justify your conclusions.

• Financial Management -

I need to know how to work the problem out

## Respond to this Question

 First Name School Subject Your Answer

## Similar Questions

1. ### Finance

Wheel Industries is considering a three year expansion project. The project requires an initial investment of \$1.5 million. The project will use straight line depreciation method. The project has no salvage value. It is estimated that …
2. ### Finance

Summer Tyme, Inc., is considering a new 4-year expansion project that requires an initial fixed asset investment of \$1.782 million. The fixed asset will be depreciated straight-line to zero over its 4-year tax life, after which time …
3. ### Finance

FIN500, Inc. has the following project. It is a 4 year project and required initial investment of \$10 million. Depreciation is straight-line over 4 years. Initial net working capital requirement is \$1.5 million and is fully recoverable …
4. ### finance

Wheel Industries is considering a three-year expansion project. The project requires an initial investment of \$1.5 million. The project will use straight-line depreciation method. The project has no salvage value. It is estimated that …
5. ### finance

You have been given the following information on a project: It has a 3-year lifetime The initial investment in the project will be \$28 million, and the investment will be depreciated straight line, down to a salvage value of \$6 million …
6. ### accounting

By Saturday, January 5, 2013, submit the following assignment: As a financial consultant, you have contracted with Wheel Industries to evaluate their procedures involving the evaluation of long term investment opportunities. You have …
7. ### Finance

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of \$1,860,000. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time …
8. ### Financial

Cochrane, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of \$1,860,000. The fixed asset falls into the three-year MACRS class (MACRS Table). The project is estimated to generate …
9. ### Finance

Wheel Industries is considering a three-year expansion project, Project A. The project requires an initial investment of \$1.5 million. The project will use the straight-line depreciation method. The project has no salvage value. It …
10. ### finance

Emma's Cabinets is looking at a project that will require \$80,000 in fixed assets and another \$20,000 in net working capital. The project is expected to produce annual sales of \$110,000 with associated costs (other than depreciation) …

More Similar Questions