Fundamentals of Finance Essay Example | Topics and Well Written Essays - 2750 words

Fundamentals of Finance - Essay ExampleThe companys current drill and platform was purchased 3 long time ago for 10M. The firm depreciates the machine using MACRS over a 5 year recovery catch when the assets are replaced due to very high precaution costs. The companys management estimates that after removal costs are taken into consideration, this platform can be sold for 3.5M. The company can also buy a new high specification platform at a cost of 14M plus installation costs of 1M and still has an estimated life of 5 years. If they decide to go ahead with this purchase then the companys working capital needs will change accounts receivable will addition to 1.5M, accounts payable will also increase to 1M and inventory will increase to 2M.Swindon is expected to be able to cope the new, proposed machine at the end of the 5-year period for 4M while the present machine at the end of the same period is expected to generate 2.5M. All else equal, the company expects to recover their Ne t Working working capital Investment at the end of the same period. The companys tax rate is at 40%. The existing machine is expected to net 3,500,000 all(prenominal) 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 1,000 hit value, 6.5% coupon occupy rate, 10 year bonds on which annual interest payments will be made. To sell the issue, an average discount of 20 per bond needs to be given. There also is an associated flotation cost of 2% of compare 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 100/share, (b) the annual dividend rate is 6% of the par value, (c) the flotation cost is expected to be 4 per share. The preferred stock is expected to sell for 102 before cost considerations.