Premium Essay

Road King Trucks

In: Business and Management

Submitted By rocio418
Words 1364
Pages 6
Provide only cost of capital, operating cash flows, net working capital requirements, terminal year cash flow adjustments, capital budgeting techniques: NPV, IRR, Profitability Index, and Payback. (As mentioned)

Solution:- Computation of cost of capital (WACC):-
Debt ratio = 40%
Marginal tax rate = 40%
Forecasted average inflation = 3.50%
Current bond's yield to maturity = 6.50%
Current 10 year treasury notes yield i.e. Risk free rate of return (Rf) = 4%
Market risk premium (Mp) = 5.50%
Beta (β) = 1.15 Debt ratio (i.e. 40%) = Total Debt/Total Capital Employed = 40/100 Total Capital employed = 100
Debt capital ( D ) = 40
Equity Capital ( E ) = 60

Cost of debt (kd) = Current yield on bond*(1-tax rate) = 6.5%*(1-40%) = 3.90% Cost of equity (Ke) = Rf+(β*Mp) = 4%+(1.15*5.5%) = 10.33%

Cost of Capital (WACC) (Ko) = (Kd*(D/(D+E)))+(Ke*(E/(E+D))) = (3.9%*(40/100))+(10.33%*(60/100)) = 7.76% Cost of capital of Road King Trucks is 7.76% (as calculated above).

Similar Documents

Premium Essay

Road King Trucks

...Road King Trucks Introduction Michael Livingston has recently been hired as the CEO of Road King Trucks, Inc. Previously he had been the marketing manager for a large manufacturing company and had established a reputation for identifying new consumer trends. Road King Trucks Inc. is a California-based truck manufacturing company. The company is well known for manufacturing large, heavy-duty trucks at a reasonable cost. One of its greatest achievements is that its trucks can be easily modified or customized for different applications. Road King Trucks also builds school buses. The company is considering an expansion of its current product line to include transit buses. Mr. Livingston feels that due to high gasoline prices, commuters will be more willing to consider using mass transit instead of using their cars to commute to work. Company Profile Road King Trucks, Inc. was established by the Smith brothers in 1880 as the California Wagon Company. The firm started manufacturing horse-drawn wagons to serve the growing population in California. The brothers quickly realized that the times were changing, so they started looking for the technologies that would keep them at the forefront of their field of business. In 1915, the Smith brothers decided that they needed to make trucks as replacements for the wagons, because trucks were starting to serve the same uses as wagons, and the wagon industry was not going to be viable in the longer term. The company started...

Words: 1663 - Pages: 7

Premium Essay

Road King Truck

...ROAD KING TRUCKS CASE ANALYSIS Capital is the source of fiancé through which resources are provided. It may be debt financing or equity financing. The cost of debt financing is interest which is the before tax cost of capital, while after tax cost of capital is r (1-t). If the interest rate or yield to maturity is 6.5% and the rate of tax is 40%, it means that before tax cost of capital is 6.5% and after tax cost of capital is 3.9%. In equity finance the cost of capital is dividend. If the rate of dividend is 10%. The after tax cost of capital and before tax cost of capital are same, which is 10% as there is no tax shield available, as the dividend is not the expense, rather it is distribution of profit. The cost of equity can also be calculated by using the capital assets pricing model, which is known as CAPM. In this case under the CAPM, the cost of equity is 10.33% If a project is financed only from debt financing the cost of capital will be 3.9% and if it is only financed from equity the cost will be 10.33%. When there is no debt the WACC is equal to the cost of equity, as there is no tax shield available on cost of equity, therefore it is always on higher side but when the debt is introduced, the WACC started to fall down as the weightage of low cost of financing is increasing. The cost of debt financing is always on lower side due to tax shield. But if financing is done 40% from debt and 60% from equity, then the cost of capital will be 7.76%. The...

Words: 776 - Pages: 4

Premium Essay

Road King Trucks

...Road Kings Trucks Abstract This paper is an analysis of Road King Trucks’ new project which is introducing a new product into its product line. I will decide whether run the project or not. Six issues will be discussed as follows 1) importance of energy cost; 2) project’s cash flows; 3) cost of capital; 4) choose an engine 5) evaluation 6) accept or reject. We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the scale like this. The company has a bond rating of AA that makes the risk relatively low. So we should definitely say yes. Issues Importance of Energy Cost Road King Trucks, Inc. is a truck manufacturing company. The new CEO Michael Livingston arranged a meeting with the firm’s top managers and engineers considering introducing a large, public transit bus into its current product line. As the oil prices keep going high and have no sign of decreasing. Mr. Livingston thought it would lead people more likely to use public transportation. The price of gas has gone up for the 30th day in a row, and with it tempers are rising. Increased demand for public transportation is expected to continue into the spring [1]. The impact of high oil prices makes people more willingly to use public transportation and there will be an increase of riders. The company should adapt itself to the changes of market. Now it is a fashion to be “Green”. People show great environmental consciousness to the world...

Words: 908 - Pages: 4

Premium Essay

Road King Trucks

...To: Subject: Road King Trucks: Project Deliverables Here is what I expect for your individual projects: A report broken down into the following sections: Summary results and recommendations—up front, concise, and to the point. Answers to the 6 questions asked—devote a paragraph to each, with individual headings Attached exhibits which are readable and understandable (I suggest using Calibri font in 11 pitch for the spreadsheet(s), because it is plain and easy to read) Spreadsheet printout(s) showing your derivation of Operating Cash Flows Incremental Cash Flows, including investment and salvage Warranty costs WACC NPV and IRR Any other supporting exhibits you feel are relevant A file containing your spreadsheet file, including all supporting elements. I want to get a sense of how well you used the power of the Excel program to make your calculations. A simple typed report is adequate. I do not need fancy graphics or covers. Use 12 pitch, Times Roman font for the body of the report. Single spacing is preferred, and will allow you more than enough space to complete your report in less than 5 pages. You should refer back to your exhibits for data or calculations, keeping them out of the main body of the report. Make sure name is listed on a cover sheet, as well as the project title and the date. The cover page does not count against the 5 page limit. I am a stickler for grammar, punctuation, and spelling (GPS). Proof read your document well...

Words: 313 - Pages: 2

Premium Essay

Road King Trucks Case Analysis

...Road King Trucks Case Analysis Abstract This paper is an analysis of Road King Trucks’ new project which is introducing a new product into its product line. I will decide whether run the project or not. Six issues will be discussed as follows 1) importance of energy cost; 2) project’s cash flows; 3) cost of capital; 4) choose an engine 5) evaluation 6) accept or reject. We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the scale like this. The company has a bond rating of AA that makes the risk relatively low. So we should definitely say yes. Issues Importance of Energy Cost Road King Trucks, Inc. is a truck manufacturing company. The new CEO Michael Livingston arranged a meeting with the firm’s top managers and engineers considering introducing a large, public transit bus into its current product line. As the oil prices keep going high and have no sign of decreasing. Mr. Livingston thought it would lead people more likely to use public transportation. The price of gas has gone up for the 30th day in a row, and with it tempers are rising. Increased demand for public transportation is expected to continue into the spring [1]. The impact of high oil prices makes people more willingly to use public transportation and there will be an increase of riders. The company should adapt itself to the changes of market. Now it is a fashion to be “Green”. People show great environmental consciousness...

Words: 1118 - Pages: 5

Premium Essay

Roadking

...Road King Trucks Case Analysis Road King Trucks Case Analysis Abstract This paper is an analysis of Road King Trucks’ new project which is introducing a new product into its product line. I will decide whether run the project or not. Six issues will be discussed as follows 1) importance of energy cost; 2) project’s cash flows; 3) cost of capital; 4) choose an engine 5) evaluation 6) accept or reject. We should accept the project because of the positive NPV and high IRR. We will gain $532 million in wealth which is a big money on the scale like this. The company has a bond rating of AA that makes the risk relatively low. So we should definitely say yes. Issues Importance of Energy Cost Road King Trucks, Inc. is a truck manufacturing company. The new CEO Michael Livingston arranged a meeting with the firm’s top managers and engineers considering introducing a large, public transit bus into its current product line. As the oil prices keep going high and have no sign of decreasing. Mr. Livingston thought it would lead people more likely to use public transportation. The price of gas has gone up for the 30th day in a row, and with it tempers are rising. Increased demand for public transportation is expected to continue into the spring [1]. The impact of high oil prices makes people more willingly to use public transportation and there will be an increase of riders. The company should adapt itself to the changes of market. Now it is a fashion to be “Green”. People show great...

Words: 359 - Pages: 2

Premium Essay

Road King

...Angelica Lopez BUS 330 Business Finance Online Road King Trucks Case Paper Instructor Richard Hasse March 15, 2015 Outline Summary Mission Objectives Paper Road King Trucks Road King Trucks, Inc has been in business since 1880 and it specializes in transportation. The company was establised by the Smith brothers and it manufactured wagons. With the advance technologies and keeping up with the population they started manufacturing school buses in 1940. The school buses accounted for 50% of it's revenues. Michael Livingston is a newly hired CEO of Road King Trucks, Inc. and he's proposing a new product to the top management, chief design and manufacturing engineers. How much inportantce should be given to the energy cost situation? What are the project's cash flows for the next twenty years? What assumptions did you use? What is the company's cost of capital? What is the appropriate discount factor for you to use in evaluationg the bus project? If you decide to go ahead with the project, which of the two engines should be used in the bus, and why? Evaluate the quality of the project, by using appropriate capital budgeting techniques. Would you recommend that Road King Trucks accpet or reject the project? What are the key factors on which you base your recommendation? Capital is the source of fiancé through which resources are provided. It may be debt financing or equity financing. The cost of debt financing is interest which is the before...

Words: 694 - Pages: 3

Premium Essay

New Technolgy in the Trucking Industry

...New Technology in the Trucking Industry Sheila Hanson Southern New Hampshire University English Composition II (Eng.123) Professor McIntyre December 15, 2014 New Technology in the Trucking Industry Drivers who travel the interstate have shared the road with an 18 – wheeler, which incorporates a large portion of the transportation service industry (also known as the trucking industry), and have witnessed firsthand new technology working not only to protect the driver but you as well. New technology is defined as the specific methods, materials, and devices used to solve practical problems. Research has shown that new technology has been both helpful and harmful in changing the trucking industry, but was needed. The electronic log, an electronic clearance system (also called PrePass), and the on-board computer (also called EOBRs which stands for Electric On-Board Recorder) are some of the new technologies implemented by the trucking industry that are designed to improve safety, productivity, and help the trucking industry keep up with the changes of the manufacturing and distribution industry's choice to keep a lower level of inventory on hand by using the just-in-time business practice. The following table illustrates the major changes to the trucking industry by Congress that required new technology, in order for the trucking industry to comply with the new regulation. Table 1-History of Changes in the Trucking Industry Date | Event | 1935 | Congress passed the...

Words: 2460 - Pages: 10

Premium Essay

Road King

...ROAD KING TRUCKS CASE ANALYSIS BUS 500D ANTHONY L. HUBBLE UNIVERSITY OF LA VERNE Summary: Road King Trucks was established by the Smith brothers in 1880 as the California Wagon Company and it has been manufacturing trucks for almost a century. The company has been looking to evaluate the opportunity of manufacturing “The Transit Bus”. The management has realized that the private vehicles have become very costly and people are becoming more and more aware about environmental impact of using private vehicles. Therefore, the management sees the business opportunity in the manufacture of “The Transit Bus”. Recently hired CEO Michael Livingston has a reputation for successfully identifying new consumer trends, he believes that the rise of gasoline prices will force more and more urbanites to public transportation. fThe company itself has a history of transformation and adaptability beginning with the Smith Bros. decision to not only seek new technologies but also implementing them to the company. In 1915 with the advent of the truck the Smith Bros. began manufacturing trucks instead of their traditional wagon line. Again in 1940 with a new name, the Road King Truck Co. began manufactruing School Buses; it only seemed fitting that the new transformation will be to adapt to rising energy costs and fuel efficient vehicles. I have prepared the cost benefit analysis based on the projected financial data provided by various departments within the Company. I have...

Words: 1679 - Pages: 7

Premium Essay

Ethical Dilemma

...IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF Illinois Justin King, Plaintiff vs. Anheuser-Busch, Defendant Civil Action No. 12345 PLAINTIFF'S FIRST SET OF INTERROGATORIES TO DEFENDANT Pursuant to Fed. R. Civ. P. 33, Plaintiff hereby submits the following Interrogatories to Defendant. Plaintiff requests that Defendant serve its answers, in writing and under oath, to the undersigned counsel for Plaintiff at 262 Millers Ridge, Lebanon Junction, Kentucky 40150, within 30 days of service of these Interrogatories. For the purpose of these Interrogatories only, Plaintiff has used the definitions set forth below. Interrogatories 1. State your company's annual/monthly/quarterly maintenance records/requirements for all of your trucks. 2. State your company's policies as far as far as length of time that a driver can be on the road. Can you provide a copy of the drivers log? 3. State your companies accident reports and insurance policies and procedures in regards to your trucks that are on the road delivering daily. 4. State any conversations that you had with police officers about the accident, including: a. The date, time, and place of each conversation. b. What your driver stated to each officer/paramedic, attending physicians, if you cannot remember the exact words, state them as you remember. c. What each officer/attending physicians recited or said to you verbatim or what you remember. 5. State all of...

Words: 319 - Pages: 2

Free Essay

Marketing Srategy

... page7 Promotion page10 Place page 10 Price page 11 Conclusion page 12 Bibliography page 13 Introduction The South African Truck and Bus market is...

Words: 1638 - Pages: 7

Premium Essay

Justin King Case Study

...FOR THE CENTRAL DISTRICT OF ILLINOIS JUSTIN WILLIAM KING, ) ) Plaintiff. ) ) ) v. ) ) ANHEUSER-BUSCH COMPANIES, INC. ) ) Defendant. ) ____________________________________) COMPLAINT Comes Now the plaintiff, Justin King, by and through his attorney, states as follows: PARTIES AND JURISDICTION 1. Plaintiff, for all times mentioned herein, was and is a resident of Cook County, State of Illinois. 2. Defendant is a corporation with its principal place of business in St. Luis, Missouri and carries on business in the state of Illinois. 3.This court has subject matter jurisdiction over the claims presented in this complaint under 28 U.S.C. § 1332 because plaintiff...

Words: 917 - Pages: 4

Premium Essay

Personal Narrative: Traveling Through The Navajo Reservation

...CJ-7 jeep and a truck-not a small one either. It is a diesel, and only two people know how to drive it, my uncle and I. I do not know how to drive the jeep so I have to drive the truck. I am transporting my mom, three restless dogs, a truck bed with all my stuff under a camper shell, and myself. Everyone knows you can never predict the weather in Colorado, well you cannot predict the weather traveling through the Navajo Reservation or Utah either. This trip, I would have to say is the best adventure and trip that I have ever been on weather wise. We are about 20 to 30 minutes out of town, the dogs have not...

Words: 1216 - Pages: 5

Premium Essay

Pursuasive

...and message just to name a few descriptions that will be covered during analyze. The paper will have a conclusion paragraph after a persuasive sample for a virtual audience is given. After reading the information in this paper, e-tailing will be clear as well as the behaviors inherent in e-tailing. Defining ever changing e-tailing The definition for e-tailing is simple but it is used for so many different reasons. It can and is used for so many different businesses around the world. Many businesses would not succeed without it and some would not even exist. According to Turban, King, and McKay (2008), E-tailing stands for electronic retailing conducted over the Internet (Chapter 3.1 INTERNET MARKETING AND ELECTRONIC RETAILING). E-tailing is used by large and small businesses to reach the largest possible amount of consumers that can be reached. According to Turban, King, and McKay (2008), Manufacturers make out pretty good by e-tailing because they are able to bypass the intermediary and pocketing the savings (Chapter 3.1 INTERNET MARKETING AND ELECTRONIC RETAILING). Behaviors of E-tailing E-tailing has many different behaviors associated with it but the three will only be discussed in this paper. We will first go over the most important to most, Trust. Consumers worry day in and out about information that they send over the internet. People don’t believe in the security system that they...

Words: 1081 - Pages: 5

Free Essay

Unit 3 Assignment

... JUSTIN WILLIAM KING, ) ) Plaintiff. ) ) ) v. ) ) ANHEUSER-BUSCH COMPANIES, INC. ) ) Defendant. ) ____________________________________) COMPLAINT Comes Now the plaintiff, Justin King, by and through his attorney, states as follows: PARTIES AND JURISDICTION 1. Plaintiff, for all times mentioned herein, was and is a resident of Cook County, State of Illinois. 2. Defendant is a corporation with is principal place of business in Missouri and carries on business in Illinois. This court has subject matter jurisdiction over the claims presented in this complaint under 28 U.S.C. § 1332 because plaintiff is a resident of Illinois and the defendant is a citizen of Illinois and the amount in controversy exceeds $75,000, exclusive of fees and costs. Personal jurisdiction and venue are proper in this District pursuant to 28 U.S.C. § 1391 because the acts of defendant caused harm to plaintiff in Ford County, in Northern District of Illinois. COUNT I: ________ On April 8, 2011, plaintiff was traveling south on Interstate 57 just south of Chicago traveling on a motorcycle going about 60-65 MPH when a beer truck comes up behind him and flashes his lights. The client then moves into the right lane and shortly after beer cases fall off the truck and the client starts to swerve to miss the cases. On the occasion in question, defendant, Anheuser-Busch Companies, Inc., the beer truck came up from behind...

Words: 692 - Pages: 3