Question

you are the CFO of the Imaginary Products Co. the company provides the following information about...

you are the CFO of the Imaginary Products Co. the company provides the following information about its capital structure:

Debt: the firm has 200,00 bonds outstanding with a pair value of $1,000, pays 9 percent interest (semi- annual coupon payments), have a maturity of 15 years and have a quoted price of 137.55 per bond.

preferred shares: the firm also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per share. the preferred shares pay an annual dividend of 2.4 percent of the par value of $50.00.

common stock: the company also has 14 million shares of common stock outstanding with a price of $20.00 per share. the firm is expected to pay a $2.20 common dividend one year from today, and that dividend is expected to increase by 5 percent per year forever.

the firm is considering a 3 year expansion project (same operations as the existing projects of the firm) that requires a purchase of a machine of $210,000. there will be an increase in inventory of $150,000, accounts receiveable of $35,000, and accounts payable of $75,000. the machine will be in the 3- year MARCS class and the annual depreciation rates are 33 percent in year 1, 44 percent in year 2, 15 percent in year 3, and 8 percent in year 4.

the project is expected to generate Earnings Before Interest, Taxes, Deprecation, and Amortization (EBITDA) of $80,000 each year. At the end of the project (year 3) the machine can be sold for $25,000. the firms tax rate is 21 percent.

what is the terminal cash flow in year 3?

Homework Answers

Answer #1

Net Working Capital invested = Increse in invesntory + increase in accounts receivable - Increase in accounts payable

= $150,000 + $35,000 - $75,000

= $110,000

MACRS 3 year depreciation rates = 33%, 44%, 15% , 8%

Book value of machine at the end of 3rd year = $210,000 * 8% = $16,800

Sale Value = $25,000

Tax on sale of machine = (Sale Value - Book value) * tax rate

= ($25,000 - $16,800) * 21%

= $1,722

Net after tax Sale value of machine = Sale Value - tax on sale of machine

= $25,000 - $1,722

= $23,278

Terminal cash flow in year 3 = after tax sale value of machine + recovery of working capital

= $110,000 + $23,278

= $133,278

Therefore, terminal cash flow in year 3 is $133,278

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
you are the CFO of the Imaginary Products Co. the company provides the following information about...
you are the CFO of the Imaginary Products Co. the company provides the following information about its capital structure: Debt: the firm has 200,00 bonds outstanding with a pair value of $1,000, pays 9 percent interest (semi- annual coupon payments), have a maturity of 15 years and have a quoted price of 137.55 per bond. preferred shares: the firm also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per share. the preferred shares...
you are the CFO of the Imaginary Products Co. the company provides the following information about...
you are the CFO of the Imaginary Products Co. the company provides the following information about its capital structure: Debt: the firm has 200,00 bonds outstanding with a pair value of $1,000, pays 9 percent interest (semi- annual coupon payments), have a maturity of 15 years and have a quoted price of 137.55 per bond. preferred shares: the firm also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per share. the preferred shares...
you are the CFO of the Imaginary Products Co. the company provides the following information about...
you are the CFO of the Imaginary Products Co. the company provides the following information about its capital structure: Debt: the firm has 200,00 bonds outstanding with a pair value of $1,000, pays 9 percent interest (semi- annual coupon payments), have a maturity of 15 years and have a quoted price of 137.55 per bond. preferred shares: the firm also has an issue of 2 million preferred shares outstanding with a market price of $12.00 per share. the preferred shares...
The Imaginary Products Co. currently has debt with a market value of $275 million outstanding. The...
The Imaginary Products Co. currently has debt with a market value of $275 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,392.42 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $11. The preferred shares pay an annual dividend of $1.20. Imaginary also has 14 million shares of common stock outstanding with a...
The Wildhorse Products Co. currently has debt with a market value of $200 million outstanding. The...
The Wildhorse Products Co. currently has debt with a market value of $200 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,434.63 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $16 per share. The preferred shares pay an annual dividend of $1.20. Wildhorse also has 14 million shares of common stock outstanding...
The Wildhorse Products Co. currently has debt with a market value of $200 million outstanding. The...
The Wildhorse Products Co. currently has debt with a market value of $200 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,434.63 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $16 per share. The preferred shares pay an annual dividend of $1.20. Wildhorse also has 14 million shares of common stock outstanding...
The Oriole Products Co. currently has debt with a market value of $275 million outstanding. The...
The Oriole Products Co. currently has debt with a market value of $275 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,423.92 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $13 per share. The preferred shares pay an annual dividend of $1.20. Oriole also has 14 million shares of common stock outstanding...
The Oriole Products Co. currently has debt with a market value of $275 million outstanding. The...
The Oriole Products Co. currently has debt with a market value of $275 million outstanding. The debt consists of 9 percent coupon bonds (semiannual coupon payments) which have a maturity of 15 years and are currently priced at $1,429.26 per bond. The firm also has an issue of 2 million preferred shares outstanding with a market price of $14 per share. The preferred shares pay an annual dividend of $1.20. Oriole also has 14 million shares of common stock outstanding...
Marshal Ltd currently has $250 million of market value debt outstanding. The 9 percent coupon bonds...
Marshal Ltd currently has $250 million of market value debt outstanding. The 9 percent coupon bonds (semiannual pay) have a maturity of 15 years and are currently priced at $877.07 per bond. The company also has an issue of 2 million perpetual preference shares outstanding with a market price of $27. The perpetual preference shares offer an annual dividend of $1.20. Imaginary also has 14 million shares of ordinary shares outstanding with a price of $20.00 per share. The company...
You are given the following information concerning Parrothead Enterprises: Debt: 9,600 7.1 percent coupon bonds outstanding,...
You are given the following information concerning Parrothead Enterprises: Debt: 9,600 7.1 percent coupon bonds outstanding, with 24 years to maturity and a quoted price of 105.5. These bonds pay interest semiannually. Common stock: 255,000 shares of common stock selling for $65.10 per share. The stock has a beta of .91 and will pay a dividend of $3.30 next year. The dividend is expected to grow by 5.1 percent per year indefinitely. Preferred stock: 8,600 shares of 4.55 percent preferred...