Assume that Ideko's market share after 2005 will increase each year, the required production volume for...
Assume that Ideko's market share after 2005 will increase each year, the required production volume for the following five years are shown here:
Sales Date Growth rate
Market Size (000 units) 5.00%
Market Share 0.50%
Production Value (000 units)
Ideko's [roduction plant will require an expansion in 2010 (where production volume will exceed the current level by 50%). and the cost of this expansion will be 15.0 million. Assuming the financing of the expansion will be delayed accordingly, calculate the projected interest payments and the amount of the projected interest tax shields(assuming that the interest rates in the term loans is 6.8%). through 2010. Consider an income tax rate of 35%. Ideko's balance sheet for 2005 is shown here.
2005 2006 2007 2008 2009 2010
market size 10,000 .0 10,500 11,025 11,576 12,155.1 12,762.9
market share 10,000% 10.50% 11.00% 11.50% 12.00% 12.50%
Production Value 1,000.0 1.1.2.5 1.212.8 1,331.3 1,458.6 1,595.4
Estimated 2005 Balance Sheet Data for Ideko Corp.
Balance sheet(0.00)
Assets
Cash and Equivalents 6,164
Accounts receivable 18,493
Inventories 6,165
Total current Assets 30,822
Property, plant, & Equipment 6,165
Total assets 152.654
Liabilities and stockholders equity
Accounts payable 4,654
Debt 100,000
Total liabilities 104,654
Stockholders equity 48,000
Total liabilities and equity 152,654
Homework Answers
The value of projected interest payments and the amount of the projected interest tax shields is arrived as below:
| Debt and Interest Table (in 1000s) | ||||||
| 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | |
| Value of Outstanding Debt | 100,000 | 100,000 | 100,000 | 100,000 | 100,000 | 115,000 (100,000 + 15,000) |
| Projected Interest Payment | $6,800 | $6,800 | $6,800 | $6,800 | $6,800 | |
| Project Interest Tax Shield | $2,380 | $2,380 | $2,380 | $2,380 | $2,380 | |
_____
Notes:
1) The value of annual interest payment for the period 2006 to 2010 will be calculated on the original outstanding debt value of $100,000 only. New net borrowing of $15,000 would result in incremental interest payments from the year 2011. Therefore, the amount of projected interest payment for the period 2006 to 2010 would be $6,800 (100,000*6.80%) only.
2) The amount of projected interest tax shield for each year is calculated as below:
Projected Interest Tax Shield = Projected Interest Payment*Tax Rate = 6,800*35% = $2,380
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