MAXO LTD

Maxo is an India based company that produces small cars for the emerging markets. In 2005, Maxo established a plant in Indores Special Economy Zone (SEZ). In 2011, the top management is planning to restructure the plant of Indore to improve the efficiency of operation. Hence, they are thinking to procure new machinery X for the plant. The cost of machinery X is Rs.100 lakh and the economic life of the machinery X is five years and it can be sold at Rs.10 lakh after the economic life. The WDV value of old machinery is Rs.20 lakh which can be currently sold in the market at Rs.15 lakh. In case the old machinery is not replaced, it can be used for further five years and the old machinery is not expected to have any value at the end of its economic life. The followings are the advantage of Machinery X: By the installment of Machinery X the company is expected to reduce the production cost by Rs.500/- per car. The current production of cars in a year is 10,000 units. However, Machinery X requires a dedicated engineer who has to be paid Rs.5 lakh per annum. The old plant used to run on coal, the total cost of which was Rs.1 lakh per annum. While, Machinery X runs on electricity, the estimated electricity tariff is expected to be Rs.2 lakh per annum.

Maxo is planning to finance Machinery X by the following ways; The company is planning to go for Follow-on-offer worth Rs.50 lakh. The market experts also expect that the cost of follow-on-offer would be more than 2% of cost of outstanding equity at the time of issue. The expected market return at the time of issue is 15% and the five year premium SBI bond is trading at a yield of 9%. The Maxo share has been found to be twice as sensitive as the market in long run. Rs.25 lakh will be obtained as a loan from the IFC bank @ 10% per annum. Remaining amount will be raised by Debenture with the following features The market analysts conducted a research and they found that because of the U.S economic melt-down Maxo has to issue debentures at 10% discount. Face value of a debenture is Rs.1,000/-, term to maturity is 10 years and coupon rate is 12%.

The Corporate tax rate is 40%. The company follows the straight line method for Depreciation.