Question

In: Finance

A company generates perpetual revenues averaging $20 million per year. On average, raw materials are 60%...

A company generates perpetual revenues averaging $20 million per year. On average, raw materials are 60% of revenues. There are no other operating costs. (Ignore taxes.) A vendor offers to supply all raw materials for a five-year fixed price contract of $12 million per year. Subsequently, your company will revert to variable prices for raw materials. The company cost of capital is 10% and the cost of debt is 6%

a. Calculate the value of the company with and without the fixed price contract.

b. Provide a financial explanation why there is or is not a difference between the two values. You need to discuss the finance principles.

c. What fixed price will make the company indifferent between accepting the contract and staying with existing situation?

Solutions

Expert Solution

ANSWER IN THE IMAGE. FEEL FREE TO ASK ANY DOUBTS. THUMBS UP PLEASE.


Related Solutions

You run a perpetual encabulator machine, which generates revenues averaging $25 million per year. Raw material...
You run a perpetual encabulator machine, which generates revenues averaging $25 million per year. Raw material costs are 60% of revenues. These costs are variable−they are always proportional to revenues. There are no other operating costs. The cost of capital is 11%. Your firm’s long-term borrowing rate is 8%. Now you are approached by Studebaker Capital Corp., which proposes a fixed-price contract to supply raw materials at $15 million per year for 10 years. a. What happens to the operating...
You own a small manufacturing plant that currently generates revenues of $2 million per year. Next...
You own a small manufacturing plant that currently generates revenues of $2 million per year. Next year, based upon a decision on a long-term government contract, your revenues will either increase by 20% or decrease by 25%, with equal probability, and stay at that level as long as you operate the plant. Other costs run $1.6 million dollars per year. You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital...
PaperPro had previously acquired PaperExpo, which independently generates $800 million per year in revenues, with no...
PaperPro had previously acquired PaperExpo, which independently generates $800 million per year in revenues, with no material growth. The consolidated revenues for PaperPro (post-acquisition) are $1.5 billion in year 1, $1.8 billion in year 2 (the year of the acquisition), and $2.5 billion in year 3. If PaperPro closed the acquisition of PaperExpo on October 1 of year 2, what is the apples-to-apples organic growth for PaperPro in year 2 and year 3? How does this differ from reported revenue...
You own a small manufacturing plant that currently generates revenues of $2 million per year. Next...
You own a small manufacturing plant that currently generates revenues of $2 million per year. Next year, based upon a decision on a long-term government contract, your revenues will either increase by 20% or decrease by 25%, with equal probability, and stay at that level as long as you operate the plant. Other costs run $1.6 million dollars per year. You can sell the plant at any time to a large conglomerate for $5 million and your cost of capital...
Q2. Company B earned $20 million before interest and taxes on revenues of $60 million last...
Q2. Company B earned $20 million before interest and taxes on revenues of $60 million last year. Investment in fixed capital was $12 million, and depreciation was $8 million. Working capital investment was $3 million. The company expects earnings before interest and taxes (EBIT), investment in fixed and working capital, depreciation, and sales to grow at 12% per year for the next five years. After five years, the growth in sales, EBIT, and working capital investment will decline to a...
Your company operates a steel plant. On average, revenues from the plant are $30 million per...
Your company operates a steel plant. On average, revenues from the plant are $30 million per year. All of the plants costs are variable costs and are consistently 80% of revenues, including energy costs associated with powering the plant, which represent one quarter of the plant’s costs, or an average of $6 million per year. Suppose the plant has an asset beta of 1.25, the risk-free rate is 4%, and the market risk premium is 5%. The tax rate is...
Company MNO generates between 11000 and 15000 million dollars revenue per year. Suppose that the company's...
Company MNO generates between 11000 and 15000 million dollars revenue per year. Suppose that the company's revenue stays within this range. Use an interest rate of 9.75% per year compounded continuously. Fill in the blanks in the paragraph below, rounding your answers to the nearest tenth. The present value of MNO's revenue over a five year period is between _______________ and ______________ million dollars. Over a twenty-five year period, the present value falls between ____________ and _____________ million dollars
The US generates ∼ 4,000 million megawatthours (MWh) of electricity per year (source: DOE1 ). Note:...
The US generates ∼ 4,000 million megawatthours (MWh) of electricity per year (source: DOE1 ). Note: a MWh has units of power × time, or energy. Assume that the demand for this energy is constant over the course of the day and year. Imagine building an array of solar panels in the desert in the Southwest. Allowing for night and day, sunlight will shine on the panels for 12 h per day. Electricity generated during the day will be stored...
Your all-equity firm generates $60M per year in perpetual free cash flows. The firm pays out...
Your all-equity firm generates $60M per year in perpetual free cash flows. The firm pays out the entire free cash flows to stockholders each year and is about to pay the $60M generated this year. Analysis of comparable firms tells you that your asset cost of capital is 15 percent. Assume that there are 1M shares outstanding and the capital market is perfect. a)What is the price per share for this firm att=0 just before the firm paysout the $60M?This...
on April 6, Almerinda Company purchased on account 60,500 units of raw materials at $13.00 per...
on April 6, Almerinda Company purchased on account 60,500 units of raw materials at $13.00 per unit. OnApr 21, raw materials were requisitioned for production as follows: 26,000 units for job 50 at $9.00 per unit and 26,800 units for job 51 at $13.00 per unit. journalize the entry on April 6 to record the purchase and on April 21 to record the requisition from the materials storeroom.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT