1.My firm is releasing a new line of customizable stainless-steel tumblers to the market. We believe that we have an inside line on obtaining licensing from the NCAA for logos to add to these tumblers.

My company is trying to decide whether to wait one year to find out if the licensing deal happens, or to simply introduce the product now to try and capitalize on the market's current appetite for overpriced tumblers. That choice needs to be made now, and then one year from now we will know if we have the NCAA licensing. Theoretically, we could abandon the project at that point if we don't believe it's worth operating (if we get the NCAA licensing, there is no chance of abandoning the project).

The chance of obtaining the licensing is 50%. Just to be clear, the timeline is:

Now: choose between introducing the product now or waiting a year

In one year:You find out if the licensing deal happens (50% chance either way)

Immediately following licensing deal information:

if you obtain the licensing, you will, with certainty, continue (or start, if you waited)

If you do not, you must decide whether to continue (or start) or abandon (or never start, if you waited) the project.

The appropriate discount rate for this venture is 10%. The cash flows look like this (all numbers in millions):

These are all cash flows, including after-tax impact of equipment divestiture, NWC, and so forth. It may help you to draw a decision tree to reflect the possibilities.

What is the overall value of the project?

a.$904.48

b.$895.39

c.$1790.79

d.$1908.97

e.$899.94

2.One year later, the NCAA licensing deal goes through. A few years down the road, a private equity firm is considering buying your firm. They have a good idea what renewing the licensing will cost, and what future revenues and costs will be. They're trying to decide the appropriate cost of equity. Here are some comparable public firms in the space:

Equity Beta

D/E

Abominable Snowman Beverage Co.

1.4

15%

ARKtick Cups Corporation

1.6

25%

Appalachian Trail Mugs

1.9

40%

Sivret Tumblers

1.5

10%

The private firm will initially invest 50% debt and 50% equity. What's your estimate for the proper equity beta for this firm?

a.1.90

b.2.45

c.7.5%

d.12.5%

e.None of the above are correct