Question

In: Finance

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 annual cash flow from operations in years 1,2, and 3?

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

WOTKING CAPITAL = INCREASE IN INVENTORY + INCREASE IN ACCOUNTS RECEIVABLES - INCREASE IN ACCOUNTS PAYABLES

WORKING CAPITAL =150000 + 35000 - 75000 = 110000


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