Carson Electronics is a company based in California. It produces electronic equipment and components, and sells them within USA and other countries. It considers BGT Electronics, also located in California, as the industry leader. The income statement and balance sheet of Carson Electronics and BGT Electronics are shown in Exhibit 1. Carson is planning to introduce a new equipment that would reduce electricity consumption by 40 percent. It has already conducted a market research study at a cost of $3 million and the results of the study were encouraging. The details of the revenue and costs relating to this new product are shown in Exhibit 2. Carson feels that its debt ratio is very high at 48%. It would like to reduce the debt ratio to 35% by issuing additional equity through a rights issue. The beta of Carson Electronics is estimated as 1.25. The risk-free rate based on the T-bill rate is 3% and the market risk premium is estimated as 8%.

Exhibit 1 - Income Statement and Balance Sheet Income Statement ($000)

Exhibit 2 - Project Details Investment in new machinery $7,000,000 Expected working life of machinery 7 years The machinery will be depreciated over its life using straight line depreciation Life of the project 4 years Annual sales 1,100,000 units Unit selling price $20 Variable costs 75% Fixed costs $2,000,000 At end of project life, expected selling price of the machinery $2,500,000 Tax rate 40% Working capital 20% of sales to be provided at the start of the project and recouped at the end of the project.

Question 1 The finance manager of Carson has calculated the various ratios as shown in Exhibit 3 in order to compare the performance of Carson in relation to BGT. Analyse the financial performance of Carson by: (a) Identifying the reasons why the return on equity of Carson is different from that of BGT. (b) Indicating the areas in which Carson should improve its performance.

Question 2 You are asked to analyse the new product introduction and recommend to the Carson management about the viability of this product. In this you are required to estimate the relevant cash flows and calculate the following: (a) the cost of equity for this project (b) the initial investment needed (c) the schedule of annual cash flows (d) the terminal cash flow (e) the net present value of this project

Carson BGT Net Sales (All Credit Cost of Goods Sold Variable costs Fixed Costs Gross Profit 48,000 70,000 perating Expenses (Fixed costs) Net operating Income Interest Expense Earnings before Tax Income Taxes (40%) Net Income 30,000 6,000 12,000 8,000 4,000 1,150 2.850 1,140 1,710 38,500 3.500 28,000 12,000 16,000 550 15.450 6,180 9,270 Number of Shares Outstanding Market price per share 1.000,0005.000.000 $7.50 $12 Balance Sheet (S'000 Carson BGT Cash Accounts Receivables Inventories Curent Assets Net Fixed Assets Total Assets 2,000 4,500 1,500 8,000 16,000 24,000 1,500 6,000 2,500 10,000 25,000 35,000 Carson BGT Accounts Payables Accrued Expenses Short-term Notes Payables Current Liabilities Long term debt Owners' Equit Total Liabilities and Owners' Equit 2,500 1,000 3,500 7,000 8,000 9,000 24,000 5,000 1,500 1,500 8,000 4,000 23,000 35,000 Exhibit 3 - Ratios Carson BGT 19.00% 7.13% 25.00% 8.33% 3.56% 1.14 0.93 34.22 20.00 8.57 62.50% 47.92% 3.48 40.30% 26.49% 40.00% 22.86% 13.24% 1.25 0.94 31.29 15.40 5.92 34.29% 15.71% 29.09 Returm on Equit Return on Assets Gross Profit margin erating Profit Margin Net Profit Margin Current Ratio uick Ratio Average Collection Period Inventory Turnover Accounts Payables Tumovei Total Liabilities/Total Assets Interest Bearing Debt/Total Assets Interest Coverage Ratio Carson | BG Earnings per share Price/Earnings Ratio Total Asset Turnover Equity Multiplier Fixed asset turnover Working capital turover 7.02 2.00 2.67 3 10.67 $1.85 4.05 2.00 1.52 2.8 20.00 Carson BGT Net Sales (All Credit Cost of Goods Sold Variable costs Fixed Costs Gross Profit 48,000 70,000 perating Expenses (Fixed costs) Net operating Income Interest Expense Earnings before Tax Income Taxes (40%) Net Income 30,000 6,000 12,000 8,000 4,000 1,150 2.850 1,140 1,710 38,500 3.500 28,000 12,000 16,000 550 15.450 6,180 9,270 Number of Shares Outstanding Market price per share 1.000,0005.000.000 $7.50 $12 Balance Sheet (S'000 Carson BGT Cash Accounts Receivables Inventories Curent Assets Net Fixed Assets Total Assets 2,000 4,500 1,500 8,000 16,000 24,000 1,500 6,000 2,500 10,000 25,000 35,000 Carson BGT Accounts Payables Accrued Expenses Short-term Notes Payables Current Liabilities Long term debt Owners' Equit Total Liabilities and Owners' Equit 2,500 1,000 3,500 7,000 8,000 9,000 24,000 5,000 1,500 1,500 8,000 4,000 23,000 35,000 Exhibit 3 - Ratios Carson BGT 19.00% 7.13% 25.00% 8.33% 3.56% 1.14 0.93 34.22 20.00 8.57 62.50% 47.92% 3.48 40.30% 26.49% 40.00% 22.86% 13.24% 1.25 0.94 31.29 15.40 5.92 34.29% 15.71% 29.09 Returm on Equit Return on Assets Gross Profit margin erating Profit Margin Net Profit Margin Current Ratio uick Ratio Average Collection Period Inventory Turnover Accounts Payables Tumovei Total Liabilities/Total Assets Interest Bearing Debt/Total Assets Interest Coverage Ratio Carson | BG Earnings per share Price/Earnings Ratio Total Asset Turnover Equity Multiplier Fixed asset turnover Working capital turover 7.02 2.00 2.67 3 10.67 $1.85 4.05 2.00 1.52 2.8 20.00