Ortho Decision Tools

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Assignment #8 – Capital Decision Tools - Alexis Lake Background: Ortho Mfg. produces orthopedic implants used by physicians. The company’s publicly traded stock is currently selling for $50 per share. The company pays an annual dividend of $5 per share and senior management expects that to continue to grow by 5% per year. The company has historically been profitable, but did see a decline in sales in the most recent recession. The corporate tax rate is currently 25%. To finance their investment in assets, they used their triple BBB bond rating to issue a total of 250 IDA backed revenue bonds in 2004. The par value of each bond is $100,000 for a total capital infusion $30,000,000. Today, the bonds have 20 years remaining, and the balance owed is now only $25,000,000. The fixed coupon rate on the outstanding bonds is 7%. The bonds are currently selling in the secondary market for about $104,000. Ortho Mfg. generated a 6% profit margin last year and they are on track to do that again this year. They have Total Assets of $50,000,000. These assets are financed 60% with Debt and 40 % with Equity. Assets: Current assets All Other assets Total Assets Liabilities: Current liabilities Bonds Shareholders equity Common Stock Retained earnings Total Liab. & SH Equity

$7m $43 m $50 m $5m $25 m $18 m $2m $50 m

The company has been presented with 3 separate proposals for projects to consider in the coming year. They are expected to be highly reluctant to approve any project where the computed Internal Rate of Return is less than the average cost of capital computed by the finance director to be 9%. Assignment Staff has been asked to submit their ideas for improving financial performance. Using the evaluation tools you have learned, calculate the a) annual cash flow b) payback period, c) NPV, and d) IRR for each project and indicate if you would recommend or reject the project.


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