Your boss has asked you to analyze a potential new product, and to recommend if the company should produce and sell the product. Specifically, your boss wants you to prepare a spreadsheet that shows the free cash flows the product would generate, and shows what the product’s net present value and internal rate of return are and what your recommendation is.
Financial information Your company’s stock price is $41.09 per share, the last annual dividend was $2.00 per share, and market analysts who follow your company’s stock expect the dividends to grow forever at a rate of 5.0% per year. The company’s beta is 1.6 and Treasury bills are paying 2.4% per year. The company’s bonds have a par value of $1,000, pay a coupon of 6% per year, semiannually, have 10 years to maturity, and are trading at $903. The company’s treasurer estimates that the new product would require a $350,000 increase in net working capital. She also has told you the company’s target capital structure is 40% debt and 60% equity, the company’s tax rate is 30%, and she expects the stock market return over the next year will be 8.0%.
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