1.Jurgen Knudsen has been hired to provide industry expertise to Henrik Sandell, CFA, an analyst for a

pension plan managing a global large-cap fund internally. Sandell is concerned about one of the fund's

larger holdings, auto parts manufacturer Kruspa AB. Kruspa currently operates in80countries, with the

previous year's global revenues at $5.6 billion. Recently, Kruspa's CFO announced plans for expansion

into China. Sandell worries that this expansion will change the company's risk prole and wonders if he

should recommend a sale of the position. Sandell provides Knudsen with the basic information.

Kruspa's global annual free cash ow to the rm is $500 million and earnings are $400 million. Sandell

estimates that cash ow will level off at a 2 percent rate of growth. Sandell also estimates that Kruspa's

after-tax free cash ow to the rm on the China project for next three years is, respectively, $48 million,

$52 million, and $54.4 million. Kruspa recently announced a dividend of $4.00 per share of stock. For

the initial analysis, Sandell requests that Knudsen ignore possible currency uctuations. He expects the

Chinese plant to sell only to customers within China for the rst three years. Knudsen is asked to

evaluate Kruspa's planned nancing of the required $100 million with a $80 public offering of 10-year

debt in Sweden and the remainder with an equity offering. Additional information:

Rm=Equity risk premium, Sweden 4.82%

Rf=Risk-free rate of interest, Sweden 4.25%

Industry debt-to-equity ratio 0.3

Market value of Kruspa's debt $900 million

Market value of Kruspa's equity $2.4 billion

Kruspa's equity beta 1.3

Kruspa's before-tax cost of debt 9.25%

China credit A2 country risk premium 1.88%

Corporate tax rate 37.5%

Interest payments each year Level

Required:

a) Using the capital asset pricing model, Calculate the Kruspa's cost of equity capital for its typical

project.

b) Sandell is interested in the weighted average cost of capital of Kruspa AB prior to its investing in

the China project, calculate this weighted average cost of capital (WACC) of this project.

c) In his estimation of the project's cost of capital, Sandell would like to use the asset beta of Kruspa

as a base in his calculations, estimate the asset beta of Kruspa prior to the China project.

2. Mary Benn, CFA, is a nancial analyst for Twin Fields Investments, located in Storrs, Connecticut,

U.S.A. She has been asked by her supervisor, Bill Cho, to examine two small Japanese cell phone

component manufacturers: 4G, Inc., and Qphone Corp. Cho indicates that his clients are most

interested in the use of leverage by 4G and Qphone. Benn states, "I will have to specically analyze

each company's respective business risk, sales risk, operating risk, and nancial risk." Benn begins her

analysis by examining the sales prospects of the two rms. The results of her sales analysis appear in

Exhibit A. She also expects very little price variability for these cell phones. She next gathers more data

on these two companies to assist her analysis of their operating and nancial risk. The relevant data for

analysis of 4G is contained in Exhibit B, while Benn's analysis of the Qphone data appears in Exhibit C.

Required:

a) Based on the information in Exhibit B, calculate the degree of operating leverage (DOL) of

4G, Inc., at unit sales of 1,200,000.

b) Based on the information in Exhibit B, 4G, Inc.'s calculate the degree of nancial leverage

(DFL), at unit sales of 1,000,000.

c) Based on the information in Exhibit A and Exhibit C, calculate the Qphone's expected

percentage change in operating income for 2010.

d) Calculate the 4G's breakeven quantity of unit sales.