As a financial consultant at Alexandra Anderson & Co., you and your team have been assigned...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
As a financial consultant at Alexandra Anderson & Co., you and your team have been assigned to work on the WalterCola account, a fortune 500 soft drink beverage producer. Max Prophet, CEO of WC, has hired AA & Co. because his two most trusted managers have vastly different opinions regarding WalterCola's entry into the coffee business. WC's core products are soft drinks, where they currently have a 27% market share. However, soft drink sales are weakening as more and more consumers turn to coffee, especially in the afternoon. WC's research and development team has just come up with a can that will heat up its contents at the touch of a button. Moreover, two years ago WC purchased the right from SunDoes CoffeeTM, currently the number one name brand in coffee, to use its secret coffee recipe in WC products. Preliminary test marketing has shown that coffee drinkers were extremely satisfied with both the temperature and the flavor of WC's coffee product. If implemented, the plan is to sell the new coffee in the vending machines and on store shelves alongside WC Cola. The idea is that the strong brand recognition of WC Cola will spillover and jumpstart sales of the coffee. Using the above and the following information, what is your recommendation to WalterCola? A new plant would be constructed for $12 billion. Straight-line depreciation will be used. The plant will last 17-years, have a salvage value of $3 billion and a book value of $0 at the end of this time. R&D expenses to develop the can were $3 billion (including a $1 billion of unpaid bills for R&D materials that are due one year from today). The right to use SunDoes recipe was purchased for $800,000. You expect to sell 1 billion cans of coffee the 1st year, 2 billion the second, 2.5 billion the 3rd year. After the 3rd year sales are expected to grow at 12.5% until they flatten out at 4.004517 billion cans. Sales the first year are expected to be at $1.25 per can. After that, prices will increase with inflation. If the plant were operating today, you could produce the cans at a cost of $0.35 each (includes all operating costs). Economies of scale kick-in at production levels of over 2.5 billion cans at which point operating costs will fall by 15%. Accounts receivable will rise by 10% of sales beginning at the end of the first year. Accounts receivable due to the coffee sales will continue to be 10% of sales throughout the project's life. A/R will return to original level at the end of the project's life (i.e., you collect all A/R outstanding at t-17). Inventories will increase immediately by 10% of the coming year's operating costs (i.e., inventories rise at t=0 by 10% of the operating costs at t=1). Inventories resulting from this project will continue to adjust so that they are 10% of the coming year's total operating costs. Finally, inventories associated with this project will be fully depleted at the end of the project's life (i.e. inventories associated with this project are zero at the end). Similar to inventories, accounts payable will increase immediately by 5% of the coming year's operating costs. A/P resulting from this project will continue to adjust so that it remains 5% of the coming year's total operating costs. Finally, A/P will return to original levels at the end of the project's life (t=17). The risk of producing this product has similarities to both the coffee industry and the canned beverage industry. Half the project can be thought of as a "coffee" company and half as a beverage company. Your assistant gives you the following information on some pure play companies: EETA D/E 7.0% 37.0% 43.0% 50% 47.0% Company StarDoes Foglers Pipsi WalterCola Dr. Salt Industry Coffee Coffee Soft Drink Soft Drink BLeveraged 1.700 1.800 0.800 0.750 0.900 Soft Drink The company's tax rate is 42%. The market risk premium is 6%, and you decide to use a US treasury with 29-years until maturity for the risk free rate. The Treasury's annual coupon is 8.5%, it makes semiannual coupon payments, has a $10,000 face value, and currently sells for $9864.50. WalterCola has bonds outstanding with $1,000 face value, 11% annual coupon, and 8 years to maturity. They sell for $945.38. Inflation is expected to be 3% annually and will increase both operating costs and sales prices accordingly. Currently, WC has 200 million shares and a stock price of $84, WalterCola plans to finance the project with half equity and half debt. You interview the two WC managers that disagree about the project's profitability, and they give you the following information. MANAGER 1: "If we sell this coffee product we will reduce sales of our core products. I believe that for every 10 cans of coffee we sell we will be losing 3 soft drink can sales. Bottom line is that the free cash flow attributable to the coffee product should be reduced 30% to capture the loss of soda sales" MANAGER 2: "The cannibalization of soda sales by coffee will occur whether WC does it or whether our competitors decide to do it. If we do not jump on this coffee project, our soft drink competitors like Pipsi Co. will, and we will lose the coffee business and still lose soft drink sales." Write up a report with a recommendation. Include analysis for both the following scenarios: Scenario 1: Assume manager 1 is correct. Scenario 2: Assume manager 2 is correct. Your recommendation must be to accept or reject this project. The write-up should not exceed 250 words! You should clearly state your recommendation (1 sentence). Also convey whether your recommendation is a "slam-dunk" or not (1 or 2 sentences). Finally, include the key factors or additional information that would sway your opinion (1 paragraph). You do not need to have a long write-up. Rather make it short and to the point. The bulk of the analysis should be in your tables. As a financial consultant at Alexandra Anderson & Co., you and your team have been assigned to work on the WalterCola account, a fortune 500 soft drink beverage producer. Max Prophet, CEO of WC, has hired AA & Co. because his two most trusted managers have vastly different opinions regarding WalterCola's entry into the coffee business. WC's core products are soft drinks, where they currently have a 27% market share. However, soft drink sales are weakening as more and more consumers turn to coffee, especially in the afternoon. WC's research and development team has just come up with a can that will heat up its contents at the touch of a button. Moreover, two years ago WC purchased the right from SunDoes CoffeeTM, currently the number one name brand in coffee, to use its secret coffee recipe in WC products. Preliminary test marketing has shown that coffee drinkers were extremely satisfied with both the temperature and the flavor of WC's coffee product. If implemented, the plan is to sell the new coffee in the vending machines and on store shelves alongside WC Cola. The idea is that the strong brand recognition of WC Cola will spillover and jumpstart sales of the coffee. Using the above and the following information, what is your recommendation to WalterCola? A new plant would be constructed for $12 billion. Straight-line depreciation will be used. The plant will last 17-years, have a salvage value of $3 billion and a book value of $0 at the end of this time. R&D expenses to develop the can were $3 billion (including a $1 billion of unpaid bills for R&D materials that are due one year from today). The right to use SunDoes recipe was purchased for $800,000. You expect to sell 1 billion cans of coffee the 1st year, 2 billion the second, 2.5 billion the 3rd year. After the 3rd year sales are expected to grow at 12.5% until they flatten out at 4.004517 billion cans. Sales the first year are expected to be at $1.25 per can. After that, prices will increase with inflation. If the plant were operating today, you could produce the cans at a cost of $0.35 each (includes all operating costs). Economies of scale kick-in at production levels of over 2.5 billion cans at which point operating costs will fall by 15%. Accounts receivable will rise by 10% of sales beginning at the end of the first year. Accounts receivable due to the coffee sales will continue to be 10% of sales throughout the project's life. A/R will return to original level at the end of the project's life (i.e., you collect all A/R outstanding at t-17). Inventories will increase immediately by 10% of the coming year's operating costs (i.e., inventories rise at t=0 by 10% of the operating costs at t=1). Inventories resulting from this project will continue to adjust so that they are 10% of the coming year's total operating costs. Finally, inventories associated with this project will be fully depleted at the end of the project's life (i.e. inventories associated with this project are zero at the end). Similar to inventories, accounts payable will increase immediately by 5% of the coming year's operating costs. A/P resulting from this project will continue to adjust so that it remains 5% of the coming year's total operating costs. Finally, A/P will return to original levels at the end of the project's life (t=17). The risk of producing this product has similarities to both the coffee industry and the canned beverage industry. Half the project can be thought of as a "coffee" company and half as a beverage company. Your assistant gives you the following information on some pure play companies: EETA D/E 7.0% 37.0% 43.0% 50% 47.0% Company StarDoes Foglers Pipsi WalterCola Dr. Salt Industry Coffee Coffee Soft Drink Soft Drink BLeveraged 1.700 1.800 0.800 0.750 0.900 Soft Drink The company's tax rate is 42%. The market risk premium is 6%, and you decide to use a US treasury with 29-years until maturity for the risk free rate. The Treasury's annual coupon is 8.5%, it makes semiannual coupon payments, has a $10,000 face value, and currently sells for $9864.50. WalterCola has bonds outstanding with $1,000 face value, 11% annual coupon, and 8 years to maturity. They sell for $945.38. Inflation is expected to be 3% annually and will increase both operating costs and sales prices accordingly. Currently, WC has 200 million shares and a stock price of $84, WalterCola plans to finance the project with half equity and half debt. You interview the two WC managers that disagree about the project's profitability, and they give you the following information. MANAGER 1: "If we sell this coffee product we will reduce sales of our core products. I believe that for every 10 cans of coffee we sell we will be losing 3 soft drink can sales. Bottom line is that the free cash flow attributable to the coffee product should be reduced 30% to capture the loss of soda sales" MANAGER 2: "The cannibalization of soda sales by coffee will occur whether WC does it or whether our competitors decide to do it. If we do not jump on this coffee project, our soft drink competitors like Pipsi Co. will, and we will lose the coffee business and still lose soft drink sales." Write up a report with a recommendation. Include analysis for both the following scenarios: Scenario 1: Assume manager 1 is correct. Scenario 2: Assume manager 2 is correct. Your recommendation must be to accept or reject this project. The write-up should not exceed 250 words! You should clearly state your recommendation (1 sentence). Also convey whether your recommendation is a "slam-dunk" or not (1 or 2 sentences). Finally, include the key factors or additional information that would sway your opinion (1 paragraph). You do not need to have a long write-up. Rather make it short and to the point. The bulk of the analysis should be in your tables. As a financial consultant at Alexandra Anderson & Co., you and your team have been assigned to work on the WalterCola account, a fortune 500 soft drink beverage producer. Max Prophet, CEO of WC, has hired AA & Co. because his two most trusted managers have vastly different opinions regarding WalterCola's entry into the coffee business. WC's core products are soft drinks, where they currently have a 27% market share. However, soft drink sales are weakening as more and more consumers turn to coffee, especially in the afternoon. WC's research and development team has just come up with a can that will heat up its contents at the touch of a button. Moreover, two years ago WC purchased the right from SunDoes CoffeeTM, currently the number one name brand in coffee, to use its secret coffee recipe in WC products. Preliminary test marketing has shown that coffee drinkers were extremely satisfied with both the temperature and the flavor of WC's coffee product. If implemented, the plan is to sell the new coffee in the vending machines and on store shelves alongside WC Cola. The idea is that the strong brand recognition of WC Cola will spillover and jumpstart sales of the coffee. Using the above and the following information, what is your recommendation to WalterCola? A new plant would be constructed for $12 billion. Straight-line depreciation will be used. The plant will last 17-years, have a salvage value of $3 billion and a book value of $0 at the end of this time. R&D expenses to develop the can were $3 billion (including a $1 billion of unpaid bills for R&D materials that are due one year from today). The right to use SunDoes recipe was purchased for $800,000. You expect to sell 1 billion cans of coffee the 1st year, 2 billion the second, 2.5 billion the 3rd year. After the 3rd year sales are expected to grow at 12.5% until they flatten out at 4.004517 billion cans. Sales the first year are expected to be at $1.25 per can. After that, prices will increase with inflation. If the plant were operating today, you could produce the cans at a cost of $0.35 each (includes all operating costs). Economies of scale kick-in at production levels of over 2.5 billion cans at which point operating costs will fall by 15%. Accounts receivable will rise by 10% of sales beginning at the end of the first year. Accounts receivable due to the coffee sales will continue to be 10% of sales throughout the project's life. A/R will return to original level at the end of the project's life (i.e., you collect all A/R outstanding at t-17). Inventories will increase immediately by 10% of the coming year's operating costs (i.e., inventories rise at t=0 by 10% of the operating costs at t=1). Inventories resulting from this project will continue to adjust so that they are 10% of the coming year's total operating costs. Finally, inventories associated with this project will be fully depleted at the end of the project's life (i.e. inventories associated with this project are zero at the end). Similar to inventories, accounts payable will increase immediately by 5% of the coming year's operating costs. A/P resulting from this project will continue to adjust so that it remains 5% of the coming year's total operating costs. Finally, A/P will return to original levels at the end of the project's life (t=17). The risk of producing this product has similarities to both the coffee industry and the canned beverage industry. Half the project can be thought of as a "coffee" company and half as a beverage company. Your assistant gives you the following information on some pure play companies: EETA D/E 7.0% 37.0% 43.0% 50% 47.0% Company StarDoes Foglers Pipsi WalterCola Dr. Salt Industry Coffee Coffee Soft Drink Soft Drink BLeveraged 1.700 1.800 0.800 0.750 0.900 Soft Drink The company's tax rate is 42%. The market risk premium is 6%, and you decide to use a US treasury with 29-years until maturity for the risk free rate. The Treasury's annual coupon is 8.5%, it makes semiannual coupon payments, has a $10,000 face value, and currently sells for $9864.50. WalterCola has bonds outstanding with $1,000 face value, 11% annual coupon, and 8 years to maturity. They sell for $945.38. Inflation is expected to be 3% annually and will increase both operating costs and sales prices accordingly. Currently, WC has 200 million shares and a stock price of $84, WalterCola plans to finance the project with half equity and half debt. You interview the two WC managers that disagree about the project's profitability, and they give you the following information. MANAGER 1: "If we sell this coffee product we will reduce sales of our core products. I believe that for every 10 cans of coffee we sell we will be losing 3 soft drink can sales. Bottom line is that the free cash flow attributable to the coffee product should be reduced 30% to capture the loss of soda sales" MANAGER 2: "The cannibalization of soda sales by coffee will occur whether WC does it or whether our competitors decide to do it. If we do not jump on this coffee project, our soft drink competitors like Pipsi Co. will, and we will lose the coffee business and still lose soft drink sales." Write up a report with a recommendation. Include analysis for both the following scenarios: Scenario 1: Assume manager 1 is correct. Scenario 2: Assume manager 2 is correct. Your recommendation must be to accept or reject this project. The write-up should not exceed 250 words! You should clearly state your recommendation (1 sentence). Also convey whether your recommendation is a "slam-dunk" or not (1 or 2 sentences). Finally, include the key factors or additional information that would sway your opinion (1 paragraph). You do not need to have a long write-up. Rather make it short and to the point. The bulk of the analysis should be in your tables. As a financial consultant at Alexandra Anderson & Co., you and your team have been assigned to work on the WalterCola account, a fortune 500 soft drink beverage producer. Max Prophet, CEO of WC, has hired AA & Co. because his two most trusted managers have vastly different opinions regarding WalterCola's entry into the coffee business. WC's core products are soft drinks, where they currently have a 27% market share. However, soft drink sales are weakening as more and more consumers turn to coffee, especially in the afternoon. WC's research and development team has just come up with a can that will heat up its contents at the touch of a button. Moreover, two years ago WC purchased the right from SunDoes CoffeeTM, currently the number one name brand in coffee, to use its secret coffee recipe in WC products. Preliminary test marketing has shown that coffee drinkers were extremely satisfied with both the temperature and the flavor of WC's coffee product. If implemented, the plan is to sell the new coffee in the vending machines and on store shelves alongside WC Cola. The idea is that the strong brand recognition of WC Cola will spillover and jumpstart sales of the coffee. Using the above and the following information, what is your recommendation to WalterCola? A new plant would be constructed for $12 billion. Straight-line depreciation will be used. The plant will last 17-years, have a salvage value of $3 billion and a book value of $0 at the end of this time. R&D expenses to develop the can were $3 billion (including a $1 billion of unpaid bills for R&D materials that are due one year from today). The right to use SunDoes recipe was purchased for $800,000. You expect to sell 1 billion cans of coffee the 1st year, 2 billion the second, 2.5 billion the 3rd year. After the 3rd year sales are expected to grow at 12.5% until they flatten out at 4.004517 billion cans. Sales the first year are expected to be at $1.25 per can. After that, prices will increase with inflation. If the plant were operating today, you could produce the cans at a cost of $0.35 each (includes all operating costs). Economies of scale kick-in at production levels of over 2.5 billion cans at which point operating costs will fall by 15%. Accounts receivable will rise by 10% of sales beginning at the end of the first year. Accounts receivable due to the coffee sales will continue to be 10% of sales throughout the project's life. A/R will return to original level at the end of the project's life (i.e., you collect all A/R outstanding at t-17). Inventories will increase immediately by 10% of the coming year's operating costs (i.e., inventories rise at t=0 by 10% of the operating costs at t=1). Inventories resulting from this project will continue to adjust so that they are 10% of the coming year's total operating costs. Finally, inventories associated with this project will be fully depleted at the end of the project's life (i.e. inventories associated with this project are zero at the end). Similar to inventories, accounts payable will increase immediately by 5% of the coming year's operating costs. A/P resulting from this project will continue to adjust so that it remains 5% of the coming year's total operating costs. Finally, A/P will return to original levels at the end of the project's life (t=17). The risk of producing this product has similarities to both the coffee industry and the canned beverage industry. Half the project can be thought of as a "coffee" company and half as a beverage company. Your assistant gives you the following information on some pure play companies: EETA D/E 7.0% 37.0% 43.0% 50% 47.0% Company StarDoes Foglers Pipsi WalterCola Dr. Salt Industry Coffee Coffee Soft Drink Soft Drink BLeveraged 1.700 1.800 0.800 0.750 0.900 Soft Drink The company's tax rate is 42%. The market risk premium is 6%, and you decide to use a US treasury with 29-years until maturity for the risk free rate. The Treasury's annual coupon is 8.5%, it makes semiannual coupon payments, has a $10,000 face value, and currently sells for $9864.50. WalterCola has bonds outstanding with $1,000 face value, 11% annual coupon, and 8 years to maturity. They sell for $945.38. Inflation is expected to be 3% annually and will increase both operating costs and sales prices accordingly. Currently, WC has 200 million shares and a stock price of $84, WalterCola plans to finance the project with half equity and half debt. You interview the two WC managers that disagree about the project's profitability, and they give you the following information. MANAGER 1: "If we sell this coffee product we will reduce sales of our core products. I believe that for every 10 cans of coffee we sell we will be losing 3 soft drink can sales. Bottom line is that the free cash flow attributable to the coffee product should be reduced 30% to capture the loss of soda sales" MANAGER 2: "The cannibalization of soda sales by coffee will occur whether WC does it or whether our competitors decide to do it. If we do not jump on this coffee project, our soft drink competitors like Pipsi Co. will, and we will lose the coffee business and still lose soft drink sales." Write up a report with a recommendation. Include analysis for both the following scenarios: Scenario 1: Assume manager 1 is correct. Scenario 2: Assume manager 2 is correct. Your recommendation must be to accept or reject this project. The write-up should not exceed 250 words! You should clearly state your recommendation (1 sentence). Also convey whether your recommendation is a "slam-dunk" or not (1 or 2 sentences). Finally, include the key factors or additional information that would sway your opinion (1 paragraph). You do not need to have a long write-up. Rather make it short and to the point. The bulk of the analysis should be in your tables.
Expert Answer:
Answer rating: 100% (QA)
The substitution effect is the decrease in sales for a product that can be attributed to consumers switching to cheaper alternatives when its price rises A product may lose market share for many reaso... View the full answer
Related Book For
Auditing and Assurance Services Understanding the Integrated Audit
ISBN: 978-0471726340
1st edition
Authors: Karen L. Hooks
Posted Date:
Students also viewed these finance questions
-
You have been assigned to work on your firms largest client, DOMO Electronics, a publicly traded company with operations in North and South America, Europe, and Asia. In your process of evaluating...
-
A computer science student assigned to work on deadlocks thinks of the following brilliant way to eliminate deadlocks. When a process requests a resource, it specifies a time limit. If the process...
-
You have been appointed as a financial consultant by the Directors of auckland holdings they require you to calculate the cost of capital of the company. The following information is available on the...
-
iHerb Inc. has several herb extractor evaporators that were purchased four years ago at a price of $20,000. These machines currently require annual maintenance costs of $2,000. However, the...
-
Anita Loyd cams $1,775 semimonthly. She is single and claims two withholding allowances. She also pays $12.83 each pay period for nonexempt health insurance. What is her net pay?
-
According to a survey, the probability that a randomly selected worker primarily rides a bicycle to work is 0.792. The probability that a randomly selected worker primarily takes public...
-
Vibration spectra can have many frequency peaks. What is key to simplifying the analysis of the number of peaks of interest?
-
The bookkeeper of Greener Landscaping, Inc., prepared the companys balance sheet while the accountant was ill. The balance sheet contains numerous errors. In particular, the bookkeeper knew that the...
-
Respond in a summative manner to the 2 separate posts. Post 1 In your reading it sets forth the pronouncement that the Constitution is the supreme law of the land. How does Planned Parenthood of S.E....
-
Pay Corporation acquired a 75 percent interest in Sue Corporation for $600,000 on January 1, 2011, when Sue's equity consisted of $300,000 capital stock and $100,000 retained earnings. The fair...
-
Write a Scoreboard class that maintains the top 10 scores for a game application using a singly linked list. The data should store the Name and Score. Prompt the user for name and score, then place...
-
Bea and Julia agreed on the sale of Bea's property at the price of P1M. The delivery was agreed to be on March 15, 2020. However, on March 15, 2020, Bea's property is still mortgaged to a bank. What...
-
Suppose the following information is related to legal merger: The combinor issued 10000 common shares with $10 par value and $20 FMV to acquire all the voting common stocks of combinee. The business...
-
The client has provided you with the calculations below, and asked you to determine whether an investment in sector (X) is a profitable investment. We ask you to answer this question through the...
-
The store accountant receives an invoice for $1,400.00 at list price. plus a 554 freight bill with trade discounts of 20 and 10. The in voice is paid on time and earns an additional 2% cash discomm....
-
Write a C program that copies an array A[], inside another array B] (of the same size). The odd elements of A should be at the beginning of B; then the even elements should follow. Do not sort any of...
-
DECISION MAKING (MAKE OR OUTSOURCE) The Night's Watch Inc. produces ice machines for a variety of different customers. The costs of manufacturing and marketing ice machines at the company's normal...
-
The Strahler Stream Order System ranks streams based on the number of tributaries that have merged. It is a top-down system where rivers of the first order are the headwaters (aka outermost...
-
What types of human errors can occur in an audit, and how does the auditor reduce the likelihood that these human errors will go undetected?
-
Continuing with the 10K The Boeing Corporation, look for disclosure on leases. Does Boeing have operating leases? Capital leases? For what?
-
You have been engaged to audit the financial statements of Quinn Corporation for the year ended December 31, 2010.During the year Quinn obtained a long-term loan from a local bank. The finance terms...
-
Find each probability using the standard normal distribution. (a) \(P(z>-1.68)\) (b) \(P(z <2.23)\) (c) \(P(-0.47
-
Find the probability that a randomly selected person has an IQ score between 95 and 105. Is this an unusual event? Explain. In a standardized IQ test, scores are normally distributed, with a mean...
-
The random variable \(x\) is normally distributed with the given parameters. Find each probability. (a) \(\mu=9.2, \sigma \approx 1.62, P(x <5.97)\) (b) \(\mu=87, \sigma \approx 19, P(x>40.5)\) (c)...
Study smarter with the SolutionInn App