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Suppose you have been hired as a financial consultant to Defense Electronics, Inc. (DEI), a large,.. 1 answer below » 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 $4 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. If the company sold the land today, it would receive $5.1 million after taxes. View complete question » 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 $4 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. If the company sold the land today, it would receive $5.1 million after taxes. In five years, the land can be sold for $6.0 million after taxes, but DEI intends to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant will cost $35 million to build. The following market data on DEI’s securities are current: Document Preview: 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 $4 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. If the company sold the land today, it would receive $5.1 million after taxes. In five years, the land can be sold for $6.0 million after taxes, but DEI intends to keep the land for a future project. The company wants to build its new manufacturing plant on this land; the plant will cost $35 million to build. The following market data on DEI’s securities are current: Debt: 240,000 7.5 percent coupon bonds outstanding, 20 years to maturity, selling for 94 percent of par; the bonds have a $1,000 par value each and make semiannual payments. Common stock: 9,000,000 shares outstanding, selling for $71 per share; the estimated beta is 1.2. Preferred stock: 400,000 shares of 5.5 percent preferred stock outstanding, par value of $100 per share, selling for $81 per share. Market: 8 percent expected market risk premium; 5 percent risk-free rate. DEI uses G. M. Wharton as its lead underwriter. Wharton charges DEI spreads of 8 percent on new common equity (stock) issues, 6 percent on new preferred stock issues and 4 percent on new debt (bond) issues. Wharton has included all direct and indirect costs (along with its profit) in setting these spreads. In estimating DEI’s WACC, you should assume that DEI retains their existing capital structure weights for debt, common stock and preferred stock in order to finance the project. DEI’s tax rate is 35 percent. The project requires $1,300,000 in initial net working capital (NWC) investment to get operational. Assume Wharton… Attachments: Q.-Attachment….docx View less » Sep 14 2015 11:07 AM
