Thursday, September 12, 2019
Fundamentals of Finance Essay Example | Topics and Well Written Essays - 2750 words
Fundamentals of Finance - Essay Example The companyââ¬â¢s current drill and platform was purchased 3 years ago for à £10M. The firm depreciates the machine using MACRS over a 5 year recovery period when the assets are replaced due to very high maintenance costs. The companyââ¬â¢s management estimates that after removal costs are taken into consideration, this platform can be sold for à £3.5M. The company can also buy a new high specification platform at a cost of à £14M plus installation costs of à £1M and still has an estimated life of 5 years. If they decide to go ahead with this purchase then the companyââ¬â¢s working capital needs will change; accounts receivable will increase to à £1.5M, accounts payable will also increase to à £1M and inventory will increase to à £2M. Swindon is expected to be able to sell the new, proposed machine at the end of the 5-year period for à £4M while the present machine at the end of the same period is expected to generate à £2.5M. All else equal, the company expects to recover their Net Working Capital Investment at the end of the same period. The companyââ¬â¢s tax rate is at 40%. The existing machine is expected to net à £3,500,000 each year for the next 5 years. Along with the C.F.O, the Operations Officer has also laid down the estimated cash flows of the company from the new drilling platform as follows: 1) DEBT: the company can raise an unlimited amount of debt by selling à £1,000 par value, 6.5% coupon interest rate, 10 year bonds on which annual interest payments will be made. To sell the issue, an average discount of à £20 per bond needs to be given. There also is an associated flotation cost of 2% of par value. 2) PREFERRED STOCK: the company can raise an unlimited amount of preferred stock under the following terms; (a) the security has a par value of à £100/share, (b) the annual dividend rate is 6% of the par value, (c) the flotation cost is expected to be à £4 per share. The preferred stock is expected to sell for à £102 before cost considerations.
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