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Category > Business & Finance Posted 15 Jul 2017 My Price 12.00

MEO Foods, Inc., has made cat food for over 20 years.

MEO Foods, Inc., has made cat food for over 20 years. The company currently has a debtequity ratio of 25 percent, borrows at a 10-percent interest rate, and is in the 40-percent tax bracket. Its shareholders require an 18-percent return. MEO is planning to expand cat food production capacity. The equipment to be purchased would last three years and generate the following unlevered cash flows (UCF):

Unlevered Cash Flows by Year (in $ millions)

0

1

2

3

4+

-15

5

8

10

0

MEO has also arranged a $6 million debt issue to partially finance the expansion. Under the loan, the company would pay 10 percent annually on the outstanding balance. The firm would also make year-end principal payments of $2 million per year, completely retiring the issue at the end of the third year. Ignoring costs of financial distress and issue costs, should MEO proceed with the expansion plan?

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Status NEW Posted 15 Jul 2017 09:07 AM My Price 12.00

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