A firm was created to undertake a project which required an initial cash outlay of $3 million and a $25,000 increase in working capital. The product sells $75 per unit. Anticipated demand is 10,000 units for 3 years. Annual fixed costs are $50,000 and variable costs are 35% of sales. Assume straight line depreciation with a $2.8 million salvage value and a 35% tax rate.

The firm has a $7 million par value bond issue outstanding (7,000 bonds with par values of $1,000 each) paying a 4% coupon rate, with 15 years remaining until maturity. This is their only bond issue and its current market value is $6.4 million. The firm has $5 million in preferred stock outstanding paying a $2 dividend per year and offering a 7% return. The firms common stock is currently selling for $55 per share with 250,000 shares outstanding. Its beta is 1.7. The S&P 500 and 3-month T-Bills is averaging 10% and 4% per year respectively.

a. What is net working capital? How does it impact project and fim valuation?

b. Set up the income statement and use it to calculate the casf flow from operations in years 0-3.

c. Define and explain the cash flow from operations. Why is this used for project valuation? What must be done to this cash flow information in order to calculate firm value?

d.Calculate the yield to maturity of the firm's debt. Is the YTM used in the WACC and CFop calculations? Why or why not?

e. Calculate the required return on equity. What can you say about this firm's risk relative to the market as a whole?

f. Calculate the firm's calital structure. Use what you know about the risks and costs of debt, equity and preferred stock to explain why the firm may have selected this capital structure.

g. Calculate the firm's WACC

h. Assume that this is the firm's only project. Use NPV, IRR and MIRR analysis to value this project at WACC. Interpret the results.

i. Assume that this is your firms only current project and that once it ends in 3 years time the free cash flows of the firm will continue to grow at a rate of 4% per year. What should its current stock be according to the DCF model? Compare the Po with the DCF estimated stock price. What causes these values to differ? Would you recomend investing in this stock, why or why not?