You have the following financial statement data for acorporation: Revenue = 10,000,000
Operating income = 7,500,000interest = 2,500,000
Net Income = 4,000,000 CurrentAssets = 10,000,000 Total Assets = 100,000,000 Current Liabilities= 8,000,000 Long-term Debt = 50,000,000
Total Common Equity = 42,000,000
You also have the followinginformation: Total Dividends Paid = 1,000,000 Common sharesoutstanding = 2,000,000
Current share price = $27
The long-term debtconsists of one bond issue that has 6 years remaining untilmaturity. Each bond has a par value of $1,000 and pays an annualcoupon. The current yield-to-maturity on the bond issue is 8%.
The firm isconsidering a capital budgeting project that will require aninitial outlay of $1,000,000 that is expected to produce net cashinflow of $200,000 each year for the next 7 years, at which timethe project will end. The project under consideration is consideredto be of equal risk as the firm's typical project. The firm has notmade a decision as to how it will finance the project, ifnecessary. If it issues new equity to finance the project, it couldsell new common equity at the current market price, while incurringtotal flotation cost of 5%.
The currentrisk-free rate of return for the market 2%, and the marketrisk-premium is estimated to stand at 7.5%. You know nothing aboutthe firm's expected dividend policy, but you do know that thefirm's equity Beta is 1.8
Based on theinformation you have, answer the following questions about the firm(You must show work for each question and answer each questionseparately in order to earn full credit):
- What is the firm's profit margin?
- Using the DuPont identity and the information given, show thevalue of the firm's equity multiplier?
- What is the firm's P/E ratio?
- What is the firm's current ratio?
- What is the best estimate of the firm's capital structureaccording to book value?
- What is the total market value of the firm's equity?
- What is the total market value of the firm's debt?
- What is the total value of the firm based on market value?
- What is the firm's capital structure based on marketvalues?
- What is the firm's pre-tax cost of debt?
- What is the best estimate for the firm's cost of common equityif using retained earnings as a financing option?
- What is the best estimate for the firm's WACC ifusing retained earnings as common equity financing?
- What is the best estimate of the NPV for theproposed capital budgeting project, given the info that youhave?
- Should the firm accept the project based on NPVanalysis? Why or why not?
- What is the IRR for the proposed project?
