Suppose you have been hired as a financial consultant to Defense Electronics, Inc
Problem 14-26
Project Evaluation [LO3, 4]
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 $3.9 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 $4.7 million. In five years, the aftertax value of the land will be $5.1 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 $31.52 million to build.
The following market data on DEI’s securities are current:
Debt: 224,000 7.4 percent coupon bonds outstanding, 25 years to maturity, selling for 109 percent of par; the bonds have a $1,000 par value each and make semiannual payments.
Common stock: 8,200,000 shares outstanding, selling for $70.40 per share; the beta is 1.2.
Preferred stock: 444,000 shares of 4 percent preferred stock outstanding, selling for $80.40 per share. Market: 6 percent expected market risk premium; 4 percent risk-free rate. DEI uses G.M. Wharton as its lead underwriter.
Answers
Status NEW
Posted 31 May 2017 08:05 AM
My Price 20.00
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file 1496221189-336787_1_8509972---capital-budgeting.xlsx preview (386 words )
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