Rolls Royce Corporation is a manufacturer and dealer of hardware components and engines used in commercial planes. Currently, the directors are considering replacement of a major production equipmentR 5

Rolls Royce Corporation is a manufacturer and dealer of hardware components and engines used in commercial planes. Currently, the directors are considering replacement of a major production equipment

Rolls Royce Corporation is a manufacturer and dealer of hardware components and engines used in commercial planes. Currently, the directors are considering replacement of a major production equipment used to manufacture the hardware components. The equipment will cost $250,000,000 and has a capacity to produce 5,000 hardware components per year for the next ten years. The variable cost of production is $12,500 per component and a selling price of $40,000 per component. Fixed cost per year will be $25,000,000 for the foreseeable future. Roll Royce Corporation will need $20,000.00 net working capital per year to undertake this investment. The entity’s weighted average cost of capital is 15%. Inflation in the economy is expected to be 5% for the foreseeable future. Depreciation is provided for on a straight-line basis and taxes are paid at the marginal rate of 30%. The directors may expand the investment if it is viable in the second year and the volatility of cash flow is 30% and the risk-free rate is at least equal to the rate of inflation. The directors also decided to finance fifty percent of the investment with debt finance by issuing ten-year 12% coupon bonds redeemable at 10% premium. Rolls Royce forecast earnings per share have been estimated at $48 and dividend of $18 per share will be paid to shareholders. Cost of equity before debt financing has been estimated at 18% using the capital asset pricing model. Divided has been growing at a constant rate of 6% per year and is expected to remain so for the foreseeable future. A one-year call option on the shares has an exercise price of $180 and the options will be valued using discrete time option pricing model. Dividend has been growing at a constant rate of 6% per year and is expected to remain so for the foreseeable future. A one year call option on the shares has an exercise price of $180 and the options will be valued using discrete time option pricing model.

Required-Compute the following: 6.25 Marks each

1. Present value of bonds

2. Present value of shares

 3. Cost of equity after debt issue 

4. Present value of call option on the shares 

5. Present value of put option on the shares 

6. Payback period 

7. Return on investment 

8. Return on capital employed 

9. Economic value added 

10. Net present value

11. Internal rate of return 

12. Modified internal rate of return 

13. Adjusted present value 

14. The option to expand the investment 

15. The investment value at risk

16. The expected loss on the investment 

Show more







Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
$26
The price is based on these factors:
Academic level
Number of pages
Urgency
Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

Delivering a high-quality product at a reasonable price is not enough anymore.
That’s why we have developed 5 beneficial guarantees that will make your experience with our service enjoyable, easy, and safe.

Money-back guarantee

You have to be 100% sure of the quality of your product to give a money-back guarantee. This describes us perfectly. Make sure that this guarantee is totally transparent.

Read more

Zero-plagiarism guarantee

Each paper is composed from scratch, according to your instructions. It is then checked by our plagiarism-detection software. There is no gap where plagiarism could squeeze in.

Read more

Free-revision policy

Thanks to our free revisions, there is no way for you to be unsatisfied. We will work on your paper until you are completely happy with the result.

Read more

Privacy policy

Your email is safe, as we store it according to international data protection rules. Your bank details are secure, as we use only reliable payment systems.

Read more

Fair-cooperation guarantee

By sending us your money, you buy the service we provide. Check out our terms and conditions if you prefer business talks to be laid out in official language.

Read more

Order your essay today and save 10% with the coupon code: best10