A manufacturing facility at a cost of $80MM. is looking for a smart investment decision to expand the company. Analysis has indicated there would be $16,000,000 in Operating cash inflows (savings) each year for the first 5 years.
Make a recommendation to as to whether they should proceed or not. Here are more information:
1. The company’s target capital strategy is 58% long-term debt, 17% Preferred and 25% common stock Equity
2. Tax rate is 28%
3. Equity – current share price is $40 and last year’s dividend was $2. Growth rate has been and is expected to stay at 5%.
a. Company’s risk (beta) has been rated at 0.65
b. The current market is returning 13% while the risk free rate has held steady at 8%
(Since we deliver a dividend, please AVERAGE the two costs to determine the AVERAGE cost of equity for our company)
4. Preferred stock – Fixed dividend of $2.21 and net proceeds from sale would be $28 per share
5. Long term debt – Our bonds are yielding a 9.5% rate