BulldogCare is an American retailer located in Kirksville, MO. The company president is Paul Miller, who inherited the company. When the company was founded over 30 years ago, it originally focused on producing food for children. Over the years, the company still maintains its primary business, accounting for about 50 percent of its total revenue. Faced with stiff competition. the company also expanded into the business of manufacturing toys and games for children. You and your team, the School of Business graduates, are hired by the company's finance department to evaluate a new project for the company. As of now, BulldogCare's only game model is a strategy card game named BulldogCompete (BLC). and sales have been excellent. BulldogCare's main competitor in the toy market is Hasbro, Inc (HAS). BulldogCare's BLC is similar to the Hasbro Monopoly model but with a more elaborate design. However, BulldogCare wants to incorporate a new card game model, the Bulldog Win (BLW), into their lineup. BulldogCare spent $1,000,000 to develop the new BLW, which features a more complex structure, and is more user friendly than the existing BLC game. The company has spent a further $400,000 on a marketing study to determine the new toy model's expected sales figures. Bulldog Care can manufacture the new model for $18 per game in variable costs. Fixed costs for the operation are estimated to run at $300,000 per year. The estimated sales volume is 50,250, 62,367, 52,084, 36,875 and 20,630 games per year for the next five years, respectively. The unit price of the new model will be $50. The necessary equipment can be purchased for $1,500,000 and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $240,000. As previously stated, Bulldog Care currently manufactures BLC. Production of the existing product is expected to be terminated in three years. If BulldogCare does not introduce the new BLW product, sales of the existing product will be 113,000, 160,050 and 89,500 games per year for the next three years, respectively. The price of the existing game is $34 per game, with variable costs of $14 each and fixed costs of $3 million per year. If BulldogCare does introduce the new game, sales of the existing one will fall by 12,000 games per year, and the price of the existing game will have to be lowered to $25 each game. Net working capital for the project will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year's sales. BulldogCare has a 20 percent corporate tax rate. The company has a target debt to equity ratio of 0.5 and is currently BBB- rated (according to S&P 500 ratings). The overall cost of capital of the company is 14 percent. The finance department of the company has asked your team to prepare a report for Paul, the company's CEO, and the report should answer the following questions. 2. The company's CEO, Paul, wants to understand the risk of the game industry better. Since BulldogCare's main competitor, Hasbro, Inc (HAS), is a leading company in this industry. Paul asks you to perform the following analysis on HAS. a. Using the past N years of data (ending at 2022) to estimate your own beta and alpha of HAS based on a regression analysis. Document data sources used. Also explain how long a time period (from which year to which year) that you decide to use to perform your estimation, and explain why? b. Provide your beta and alpha estimates, as well as the statistical significance (e.g.t ratio, p-value). Comment briefly. c. Plot the security characteristic line for this company. Clearly show alpha and beta on the diagram. Is the company correctly priced, overpriced or underpriced? d. From the above analysis, can you explain to Paul the risk characteristics of HAS and the game industry using the beta you estimated? Do you think your estimated beta makes sense given the nature of the company and the industry? 3. Paul is also interested in the cost of capital of the game industry. Therefore, he asks you to find the cost of equity, the cost of debt, and the WACC of HAS. Please show your computational steps clearly and document data sources used and any assumptions you make. 4. According to the recent estimation of BulldogCare's finance department, the overall cost of capital of BulldogCare Inc. is 14%. Can you compute the NPV and IRR of the company's new project? Please show your computation steps clearly (show your inputs if using financial calculator or excel sheet). Should Paul take the new project? Why or why not (Please explain using the NPV and IRR rules separately)? 5. Paul wants to know whether his company's current capital structure is optimal. Please give your opinion and explain briefly why using one of the capital structure theories you learned from BSAD 406? If BulldogCare's current capital structure is not optimal in your opinion, how should the company move toward a more appropriate capital structure?