University of the West Indies

University of the West Indies

Department of Management Studies

MS61T – Coursework Assessment #3

Instructions

This is an individual assignment worth 10% of your final grade.
The deadline is Saturday, April 17, 2004, 9:00am.
I would prefer if this assignment is hand written. If you choose however, you may wish to type it or use Microsoft Excel. However, these last two options will require time, so bear in mind the above deadline.

Case

Jamaica Bottling Company (JBC) Limited wants to replace its current Bottling Plant the acquisition of a new Bottling Plant. The following table details the comparison between the old Bottling Plant and the new Bottling Plant:

Old Plant

New Plant

Original Cost[1] (See footnote 1 below)

Current Age: 21 years

Original Salvage Value: $20,000,000

Current Disposal Value: $45,000,000

Useful life remaining: 15 years

Depreciation: Straight-Line

Annual Gross Cash Revenues: $90,000,000

Annual Gross Cash Expenses: $70,000,000

Investment Tax Credit: 5% of NBV at the end of 26 years of useful life (to be received in year 27)

Purchase Price: [2] (See footnote 2 below)

Shipping & Transportation Costs: $15,500,000

Depreciation: Straight-Line

Expected Salvage Value: $8,000,000

Expected useful life: 15 years

Annual Gross Cash Revenues: $125,000,000

Annual Gross Cash Expenses: $ 55,000,000

Installation Costs: $ 50,000,000

Investment Tax Credit at time of purchase: 10% of purchase price

Additional Investment Tax Credit: 5% of NBV at the end of 10 years (to be received in year 11)

Required increase in working capital: $3,800,000 (Only 50% is recoverable at termination)

JBC always finances investments in the proportions shown below:

Type of Financing	Percentage of Total Financing
6% Bonds ($1,000 par, 15-year maturity)	30%
2% Preferred Equity ($100 par)	25%
Common Equity	45%

Whenever JBC issues securities, the following floatation costs occur:

5% of market value for bonds if issuing less than $50,000,000 worth of bonds, but 20% if issuing $50,000,000 or more.
$3.00 per share for preference shares if issuing less than $60,000,000 worth of preference shares, but $7.00 per share if issuing $60,000,000 or more.
$7.50 per share for common shares if issuing less than $40,000,000 worth of common shares, but $11.00 per share is issuing $40,000,000 or more.

Current market prices are $1,040 for bonds, $18 for preference shares and $35 for common shares. There will be no internal common equity available. The next expected dividend per common share is estimated at $3.00 and is projected to have a constant annual growth rate of 7%. JBC is in a 40% tax bracket.

Required:

How much money does JBC need to finance the replacement? (15 marks)

Based on your answer to 1. above, how many bonds will it have to issue? (Round off if necessary) (6 marks)

Based on your answer to 1. above, how many preference shares will it have to issue? (Round off if necessary) (6 marks)

Based on your answer to 1. above, how many common shares will it have to issue? (Round off if necessary) (6 marks)

What is JBC’s WACC? (Round your final answer to the nearest whole number) (20 marks)

Is the new bottling plant a worthy investment and why? (40 marks)

What factors will affect the reliability of your assessment at 6. above? (7 marks)

(Total 100 marks)

[1] The original cost is going to be the digits of your id number in reverse order plus $200,000,000. Therefore if your id number is 02005678, then your original cost will be 87650020+200000000 = $287,650,020

[2] The purchase price is going to be the digits of your id number in reverse order plus $100,000,000. Therefore if your id number is 02005678, then your purchase price will be 87650020+100000000 = $187,650,020