(Solved by Humans)-QUESTION 2: WEIGHTED AVERAGE COST OF CAPITAL Defence Electronics
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QUESTION 2: WEIGHTED AVERAGE COST OF CAPITAL
Defence Electronics International (DEI) a large publicly listed company is the market leader in radar detection systems (RDSs). The company is looking to set up a manufacturing plant overseas to produce a new line of RDSs. This will be a five year project. The company bought a piece of land three years ago for $ 7 million in anticipation of using it as a toxic dump site for waste chemicals, but instead built a piping system to discard chemicals safely. If the company sold the land today it would receive $ 6.5 million after taxes. In five years the land can be sold for $4.5 million after taxes and reclamation costs. DEI wants to build a new manufacturing plant on this land. The plant will cost $15 million to build. The following market data on DEI?s securities are current:
| Debt | 150,000, 12% coupon bonds outstanding with 15 years to maturity redeemable at par, selling for 80 percent of par; the bonds have a $100 par value each and make semi-annual coupon interest payments. |
| Equity | 300,000 ordinary shares, selling for $75 per share |
| Non-redeemable Preference shares | 20,000 shares (par value $ 100 per share) with 7.2% dividends (before taxes), selling for $72 per share |
The following information is relevant:
- ???? ?DEI?s tax rate is 30%
- ???? ?The company had been paying dividends on its ordinary shares consistently. Dividends paid during the past five years is as follows
- ???? ?The project requires $ 900,000 in initial net working capital investment in year 0 to become operational.
- ???? ?Work all solutions to the nearest two decimals. Required:
- Calculate the project?s initial, (time 0) cash flows, taking into account all side effects.?
- Compute the current weighted average cost of capital (WACC) of DEI. Show all workings and state clearly the assumptions underlying your computations.
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This question was answered on: 10 May, 2025
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