Assignment: Read the following material over a company facing a critical decision. Conduct your own analysis of the firm's optionsanddevelop a recommendation. Writea 2-3pagepaper (double

Assignment:Read the following material over a company facing a critical decision. Conduct your own analysis of the firm's optionsanddevelop a recommendation. Writea 2-3pagepaper (double spacenot including graphs or other exhibits) reporting your evaluation of the options and your recommendation.

You are a financial consultant who has been retained to analyzethe presentedprojectand make a detailed recommendationon the financing of the projectto the Board.Your analysis should include at least two approaches to valuation with leverage, in your work you should show that the methods produce equivalent results.Your recommendation should include a preferred level of debt, with alternatives presented and shown to be inferior.

Your paper should be organized as a detailed professional proposal, with an executive summary and conclusions supported by data and analysis. Data and calculations should be attached in an appendix and work should be submitted in a separate spreadsheet.

The firm:

TheInitechCompany is a large manufacturer and distributor of electronic components.Despite being a major player in the industry the firm has failed to provide significant returns to its shareholders in recent history. Due to the economic downturn and because of some successful new products marketed to manufacturers of personal computersbyacompetitor,Initrode, the firm has recently undergone a period of slow but persistent growth.The new CEO, followingrecommendations of the Board, has decided to undertake a new investment opportunity.

The R & D teamoriginallyforecast that an investment of $699.6M would result in a return on the new investment of 23%. They also forecast that this new product will offer constant and ongoing growth at this rate.Theynotedthat the return on the new investment may be as low as 20% and as high as 25%.As often happens, a competitor has already entered the market and reduced the value of the project but the Board has chosen to continue. Further, as also often happens, theteamunderestimated several notable costs.The firm has $700m in cash retained to invest in this project ifnecessary.

Given the presence of a competitor theincremental cash flowswill end in 3 years. Thesecashflowsareas shown on the following page, where the Market Value balance sheet is also shown. The project is assumed to have the same average risk as the firm's other projects. The Board has indicated they would like their Debt to Value ratio to go no lower than it currentlyis, and might consider a higher level of debt it can be proven to improve firm value while not including significant levels of risk of financial distress and bankruptcy. Direct and indirect bankruptcy costs would be substantial. The equity cost of capital is 15% the cost of debt is 4% and the firm's marginal tax rate is 35%.

Sales

900.00

CoGS

180.00

Gross Profit

0.00

720.00

OperatingExpenses

403.54

150.00

Depreciation

0.00