BUSINESS FINANCE

Assessment Three is a group report in which you will have several important tasks:

1. Identify the cash flows generated by an investment that will be built and operated in a foreign country.
2. Calculate the weighted-average cost of capital (WACC) of your parent company, making an adjustment to this weighted-average cost of capital that takes in to consideration Country Risk and any additional risks the parent company might confront from this investment. Explain how your arrived at this weighted-average cost of capital.
3. Calculate the Net Present Value, the Internal Rate of Return, The Effective Annual Amount (EAA) and the Payback Period of investment projects under consideration. (Use the MS Excel worksheets provided and submit these with your report.)
4. Select the capital investment that will create the most value for the parent company. Explain why you selected this project over the other.

INSTRUCTIONS

Yummy! Restaurants Inc. is a U.S.-based company that acquires and operates fast food restaurants throughout North America.Yummy! Restaurants Inc. has enjoyed great success during the past two decades, but management realises that opportunities for major expansion in North America is limited, and if the company wishes to grow, it must expand its operations overseas.

After having spent $250,000 for professional consultation from The Nielsen Company Yummy! Restaurants Inc. has decided to follow The Nielsen Company's advice and expand its operations in Southeast Asia. The Marketing Department of Yummy! Restaurants Inc. studied demographic data and consumer taste preferences, and concluded that locating its restaurants in Viet Nam would have the highest probability for success.

Yummy! Restaurants Inc. is considering opening one of the following two restaurant brands in Viet Nam: The Bun and Run and Mr. Squid. Yummy! Restaurants Inc. plans to open one (1) of these two restaurants in Ho Chi Minh City, Viet Nam and if that restaurant is successful, it plans to immediately expand the number of restaurants to fifty (50) restaurants nation-wide.

During the month of January, 2018, Dr. Enos Pork, the Chief Financial Officer of Yummy! Restaurants Inc., and members of his staff visited Viet Nam and collected financial data needed to decide which restaurant to open. They prepared pro forma Profit and Loss statements and Cash flow statements for a ten-year period for both The Bun and Run and Mr. Squid. However, they overlooked some incremental costs that would result from investments in Viet Nam.

The CFO Dr. Enos Pork has directed you and your team members (4 team members maximum) to review all relevant financial data about Yummy! Restaurants Inc., The Bun and Run and Mr. Squid and to select which restaurant Yummy! Restaurants Inc. should open in Viet Nam.

Yummy! Restaurants Inc.

Liabilities

Bank overdraft $52,500,000

Commercial bills $100,500,000

Term loans $105,500,000

10% debentures ($1000 par) $200,000,000

Propertymortgage $215,000,000

Equipment (chattel) mortgage $235,000,000

Shareholder's fund

Paid-up capitalordinary shares ($1 par) $265,000,000

$2.50 Preference shares ($10 par) $120,000,000

$1.50 Convertible preferred shares ($5.00 par)$175,000,000

Additional information:

• The ordinary shares are currently trading at $25.40 per share.
• Government bonds trade at 2.85%, the return on the market portfolio is 8.20%
• Yummy Restaurant's, Inc.beta is 0.85
• Preference shares are trading at $42.50.
• Convertible preference shares are trading at $37.50
• The current return on Yummy! Restaurants, Inc debentures is 2.5% above the government bond rate.
• The corporate tax rate is 25%.
• The interest rate on the property mortgage was 7.50% at the time of the loan. The mortgage could be refinanced today at 6.50%.It has fifteen years remaining.
• The bank overdraft current rate is 7.50%.
• The commercial bills mature in 120 days. The market interest rate for commercial bills is 7.25%
• Term loans mature in 5 years. Current interest rates are 5.50%. Term loans originally had a 7.25% interest rate.
• Debentures are due in 15 years
• Interest is paid semi-annually on all Yummy! Restaurants, Inc. debt (Except commercial bills)
• Task:

1.) Which items should be included when calculating this firm's WACC?)

2.) Calculate the present value of each capital asset.

3.) Calculate the total present value of the capital assets and the weight of each capital asset used to calculate WACC.

4.) Calculate the weighted-average cost of capital (WACC.)

5.) The weighted average cost of capital is employed when discounting estimated cash flows of capital investments that have risk that is typical for the company.

6.) Should this rate of return be used to discount the estimated Net Cash Flows from the planned restaurants in Viet Nam? If not, how much should the weighted-average cost of capital be? Explain, in detail, how you determined the expected rate of return.Provide references and citations to support your answer.