Part I: WACC Use this information to answer questions 1-8 Suppose Intel wants to raise capital to start a new project to bring their manufacturing process back to the U.S. The pandemic has shown them that they cannot rely on a foreign supplier. The CEO asks you to calculate their weighted average cost of capital. He gives you those facts. Tax rate = 23.4%. Intel has the following bonds all have a face value of $1,000: 5-year, 4.75% coupon, semiannual payment non-callable bonds with a price of $1,022. 20-ycar, 5.2% coupon semiannual payment callable bonds with a price of $1,045. And 20 year, 5.1 % coupon semiannual payment non-callable bonds with a price of $1,040. New bonds will be privately placed with no flotation cost. Intel has preferred stock that sells for $158.00. It pays an annual dividend of $5.50. Their common stock sells for $152.43. The annual dividend is $1.15 and the dividend growth rate is 3.5% a year. The stock has a Beta of 78. The risk free rate is 1% and the market risk premium is 8.6%. Intel considers their bond-Yield Risk Premium to be 2.0%. Intel currently has 35% of their capital coming from debt, 15% from preferred stock and the 50% from common equity, however their target is to have 45% from debt, 5% from preferred stock and the rest from common equity. Part 1: What are the capital expenditures for this project? What are the cash flows for year of this project?? What is the depreciation expense in year 3 for this project? What is the revenue in year 1 for this project? What are the variable costs in year 2 for this project? What is the EBIT in year 3 for this project? What are the tax expenses in year 4 of this project? 4 of 4 714 words Q Focus s = OCT 4. Part II: Capital Budgeting Use this information to answer questions 9-18 Intel is contemplating a new project where they will bring their computer chip manufacturing business back to the United States. They are estimating that they will invest $425,116 initially then will have positive cash flows over the next four years of: Year 1: $85,000 I Year 2: $95,000 Year 3: $129,800 Year 4: $195,000 Regardless of your answer in the previous question use a WACC of 4.79%. (This is NOT the answer you should have gotten in part 1.) Part 2: What are the operating cash flows in year 2? (This is the ELIT (1-T) + Dep. Ex) What is the after tax salvage value? What are the terminal cash flows? What is the NPV of this project? What is the IRR of this project? This project does have normal cash flows and we can use the IRR to evaluate it. What is the MIRR of this project? Use the WACC as both the reinvestment rate and the finance rate. Why is the MIRR higher than the IRR? What is the payback period for this project? Part III: Cash Flow Estimation Use this information to answer questions 18 - 25 BearKat Enterprises is considering a project where they will make high end designer face masks. They can buy the cquipment they need to make the face masks for $285,000 plus another $30,000 for training and installation. They will have to increase inventory by $8,000 and accounts payable will increase $2,000. They think they can sell 30,000 masks a year at a price of $7.75 each for 4 years. The estimate variable costs at 62% of revenue. They follow a four years MACRS schedule for depreciation with the following depreciation rates: Year 1: 33% Year 2: 45% Year 3: 15% Year 4: 7% They believe the equipment has a salvage value of $30,000. BearKat Enterprises has a tax rate of 20.7%. And a WACC of 6.3%. Once the project is done the additional inventory will not need to be purchased and the accounts payable balance will be paid. Part 3: What is the discounted payback period for this project? If we increase the number of units sold by 10%, what is the NPV? If we decrease the number of units sold by 10%, what is the NPV? If we increase the WACC by 10%, what is the NPV? If we decrease the WACC by 10%, what is the NPV? If we increase the variable costs by 10%, what is the NPV? If we decrease the variable costs by 10%, what is the NPV? I Part IV: Sensitivity Analysis Use this information to answer questions 26-30. BearKat Enterprises has a WACC of 6.3% BearKat Enterprises wants you to do a sensitivity analysis where you increase the mask price by 10% and decrease it by 10%. Also see what happens when you increase the variable costs by 10% and decrease them by 10%. Part V: Scenario Analysis Use this information to answer questions 31- 34. Suppose BearKat Enterprises management team decides to do a scenario analysis. They want you to calculate the expected NPV, standard deviation, and coefficient of variation for a new project. (These are not the NPV's that you calculated earlier). They give you the following data: Best case has a 20% probability and has an NPV of $22.5 M. Base case has a 60% probability and has an NPV of $9.75M. Worst case has a 20% probability and has an NPV of -$32.4M. Part 5: 1 What is the coefficient of variation of the NPVs of this project? 1 Part I: WACC Use this information to answer questions 1-8 Suppose Intel wants to raise capital to start a new project to bring their manufacturing process back to the U.S. The pandemic has shown them that they cannot rely on a foreign supplier. The CEO asks you to calculate their weighted average cost of capital. He gives you those facts. Tax rate = 23.4%. Intel has the following bonds all have a face value of $1,000: 5-year, 4.75% coupon, semiannual payment non-callable bonds with a price of $1,022. 20-ycar, 5.2% coupon semiannual payment callable bonds with a price of $1,045. And 20 year, 5.1 % coupon semiannual payment non-callable bonds with a price of $1,040. New bonds will be privately placed with no flotation cost. Intel has preferred stock that sells for $158.00. It pays an annual dividend of $5.50. Their common stock sells for $152.43. The annual dividend is $1.15 and the dividend growth rate is 3.5% a year. The stock has a Beta of 78. The risk free rate is 1% and the market risk premium is 8.6%. Intel considers their bond-Yield Risk Premium to be 2.0%. Intel currently has 35% of their capital coming from debt, 15% from preferred stock and the 50% from common equity, however their target is to have 45% from debt, 5% from preferred stock and the rest from common equity. Part 1: What are the capital expenditures for this project? What are the cash flows for year of this project?? What is the depreciation expense in year 3 for this project? What is the revenue in year 1 for this project? What are the variable costs in year 2 for this project? What is the EBIT in year 3 for this project? What are the tax expenses in year 4 of this project? 4 of 4 714 words Q Focus s = OCT 4. Part II: Capital Budgeting Use this information to answer questions 9-18 Intel is contemplating a new project where they will bring their computer chip manufacturing business back to the United States. They are estimating that they will invest $425,116 initially then will have positive cash flows over the next four years of: Year 1: $85,000 I Year 2: $95,000 Year 3: $129,800 Year 4: $195,000 Regardless of your answer in the previous question use a WACC of 4.79%. (This is NOT the answer you should have gotten in part 1.) Part 2: What are the operating cash flows in year 2? (This is the ELIT (1-T) + Dep. Ex) What is the after tax salvage value? What are the terminal cash flows? What is the NPV of this project? What is the IRR of this project? This project does have normal cash flows and we can use the IRR to evaluate it. What is the MIRR of this project? Use the WACC as both the reinvestment rate and the finance rate. Why is the MIRR higher than the IRR? What is the payback period for this project? Part III: Cash Flow Estimation Use this information to answer questions 18 - 25 BearKat Enterprises is considering a project where they will make high end designer face masks. They can buy the cquipment they need to make the face masks for $285,000 plus another $30,000 for training and installation. They will have to increase inventory by $8,000 and accounts payable will increase $2,000. They think they can sell 30,000 masks a year at a price of $7.75 each for 4 years. The estimate variable costs at 62% of revenue. They follow a four years MACRS schedule for depreciation with the following depreciation rates: Year 1: 33% Year 2: 45% Year 3: 15% Year 4: 7% They believe the equipment has a salvage value of $30,000. BearKat Enterprises has a tax rate of 20.7%. And a WACC of 6.3%. Once the project is done the additional inventory will not need to be purchased and the accounts payable balance will be paid. Part 3: What is the discounted payback period for this project? If we increase the number of units sold by 10%, what is the NPV? If we decrease the number of units sold by 10%, what is the NPV? If we increase the WACC by 10%, what is the NPV? If we decrease the WACC by 10%, what is the NPV? If we increase the variable costs by 10%, what is the NPV? If we decrease the variable costs by 10%, what is the NPV? I Part IV: Sensitivity Analysis Use this information to answer questions 26-30. BearKat Enterprises has a WACC of 6.3% BearKat Enterprises wants you to do a sensitivity analysis where you increase the mask price by 10% and decrease it by 10%. Also see what happens when you increase the variable costs by 10% and decrease them by 10%. Part V: Scenario Analysis Use this information to answer questions 31- 34. Suppose BearKat Enterprises management team decides to do a scenario analysis. They want you to calculate the expected NPV, standard deviation, and coefficient of variation for a new project. (These are not the NPV's that you calculated earlier). They give you the following data: Best case has a 20% probability and has an NPV of $22.5 M. Base case has a 60% probability and has an NPV of $9.75M. Worst case has a 20% probability and has an NPV of -$32.4M. Part 5: 1 What is the coefficient of variation of the NPVs of this project? 1
