Corporate Finance Group Assignment

Prepared by LM

Corporate Finance Group Assignment(Total of 60 points or 20% of final assessment)Student Name .. Student ID ..

Student Name .. Student ID ..

Student Name .. Student ID ..

_____________________________________________________________________Stark Enterprises (STARK) is an advanced engineering company with close links to the defence industry. It manufactures high technology and cutting edge defence products.

The CEO of STARK, Mr. Tony Stark, wants to introduce a new product called IRON WOMAN into the market and has undertaken some customer and market research at the cost of $50 Million. He also spent an additional $95 Million on a study to quantify the cost of converting an existing factory to produce IRON WOMAN. Financing costs for the factory conversion are calculated at a bank borrowing interest rate of 10% p.a.

_____________________________________________________________________IRON WOMAN

STARKs head designer, Dr. Gary Armond estimates that it can produce and sell one IRON WOMAN per year for the next 5 years, at which point, IRON WOMAN becomes obsolete.

The costs are as follows:

Item$Billion

Operating costs each year 1.2

Plant and equipment (purchased in year 0) 1.1

Working capital (required in year 0 and repaid in year 5) 1.5

Start-up (required in year 0) 4.0

Fixed costs each year 1.0

Selling price if each unit13.05

Plant and equipment can be depreciated on a straight-line basis over the life of the project. It has no salvage value.Mr Tony Stark is also considering another new product named IRON MAIDEN. Market research and factory conversion studies were $77 Million and $90 Million respectively. Financing costs for the factory conversion are calculated at a bank borrowing interest rate of 10% p.a.

_____________________________________________________________________IRON MAIDEN

STARKs Director of Engineering, Abe Klein estimates that it can produce and sell one IRON MAIDEN per year for the next 5 years, at which point, IRON MAIDEN becomes obsolete.

The costs are as follows:

Item$Billion

Operating costs each year 1.0

Plant and equipment (purchased in year 0) 1.0

Working capital (required in year 0 and repaid in year 5) 1.5

Start-up (required in year 0) 5.0

Fixed costs each year 1.0

Selling price if each unit14.029

Plant and equipment can be depreciated on a straight-line basis over the life of the project. It has no salvage value.

_____________________________________________________________________The following information is applicable to both IRON WOMAN and IRON MAIDEN.

Tax is levied at 30%.

The required rate of return is 20% p.a.

All figures are in US Dollars.

Answers must be to 2 decimal places.

The projects are mutually exclusive.

Marks will be deducted for including incorrect items.

Use the two-step method (profit and loss statement plus cash flow statement). Submit all workings including (profit and loss statement plus cash flow statement).

_____________________________________________________________________Required:Question 1. You are required to calculate the NPV ($), IRR (%) and Payback (months) for both new products. Answers must be to two decimal places. Show all workings. (48 marks)

Question 2. Which project should Tony Stark adopt? Justify your answer. (5 marks) (100 word limit)

Question 3. Based on your recommendation in Question 2 (above), Tony Stark would like to finance the new product by selling Bonds to the market. The bonds are named IRON BONDS. Using the total costs in year 0 as the total cost of borrowing for the issue, calculate the market price on issue if the market required rate of return on issue is 10% p.a.? IRON BONDS pay a coupon rate of interest of 9% p.a. paid semi-annually. The IRON BOND is due to mature in 5 years. Answers must be to two decimal places. Show all workings. (7 marks)_____________________________________________________________________Page 1 of 2