1. The company bought some land three years ago for $3.7 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. The land was appraised last week for $4.5 million. 2. In five years, the aftertax value of the land will be $4.9 million.3. The plant and equipment will cost $21 million to build. 4. The manufacturing plant has an eight-year tax life, and RTN uses straight-line depreciation. At the end of the project, the plant and equipment can be scrapped for $3.7 million.5. The project requires $1,100,000 in initial net working capital investment to get operational.6. The plan is to manufacture 13,000 RDSs in the first year and sell them at $10,400 per machine. The following 4 years, the number to be produced grows by 15%, 20%, 12%, and 10%. We will continue to sell them at $10,400 each year.7. The company will incur $6,000,000 in annual fixed costs, and the variable production costs are $9,000 per RDS in the first year. The following 4 years, variable production costs will grow at a rate of 4%, 5%, 2%, and 2%.8. RTN’s tax rate is 35 percent. 9. The following market data on RTN’s securities is current:Debt:
222,000, 7.2 percent coupon bonds are outstanding, 25 years to maturity, selling
for 108 percent of par; the bonds have a $1,000 par value each and make
semiannual payments.
Common:
8,000,000 shares outstanding, selling for $181.30 per share; you have stock
prices and S&P 500 index value for the past five years.
Preferred:
442,000 shares of 5 percent preferred stock outstanding, selling for $80.20 per
share and having a par value of $100.
Market:
9 percent expected market risk premium; 3 percent risk-free rate.