Pierre Imports has a capital budget of $20 million. It wants to maintain a capital structure of 45 percent debt and 55 percent equity. This year it expects net income of $8 million. The company has 30 million authorized shares, and 10 million are outstanding. Last year the company paid a dividend of $0.20 per share.a. How much equity does the company need to raise?b. How much external equity does the company need to raise if it follows a residual dividend policy?c. How much external equity will the company require if it pays the same dividend as last year?
The Marchal Company is evaluating the proposed acquisition of a new machine. The machine’s base price is $250,000, and it would cost another $15,000 to modify it for special use. The machine falls into the MACRS 3-year class, and it would be sold after 2 years for $75,000. The machine would require an increase in net working capital of $5,000. The machine would have no effect on revenues, but it is expected to save the firm $100,000 per year for 2 years in before-tax operating costs. Its marginal tax rate is 30 percent and its cost of capital is 10 percent.a. Calculate the cash outflow at time zerob. Calculate the terminal year cash flow.c. Calculate NPV. Should the machinery be purchased? Why or why not?