Complete your work in the next tab Las Vegas Pharma is a small pharmaceutical company based in Nevada. Company's management is considering an investment in a four-year specialty chemical manufacturing project. You are provided with the project's proforma income statement and you also collected the following information: The project requires an initial investment of $15,000 and an additional investment of $2,000 at the end of Year 2. Equipment will be sold at the remaining book value at the end of the four-year project. The working capital is anticipated to be 10% of revenues at the beginning of each period. Working capital will be fully recovered at the end of the project. The facility where the chemical production is expected to be located is currently owned by the company and generates $1,000 in annual taxable rental revenue - ifthe company decides to proceed with this investment, this revenue stream will be discontinued. Current YTM on 10-yr. Treasury is 2.20%, the most recent interest coverage ratio of the company was 3.1 (see table in Excel file for risk premiums}, and the company is applying M RP (market risk premium) of 6.0% in estimating its cost of equity. Compam/s nance department estimates that the betas are: 1.1 for pharmaceutical businesses 1.? for specialty chemical businesses Currently, the company uses a 30l70 mix of debt and equity in its capital structure and the same capital mix will be used to fund this project. The company's marginal tax rate is 21%. in Excel le calculate the following (highlight your answers): 1} appropriate weighted average cost of capital (WACC) for this project (6 points) 2} project' 5 free cash flows (25 point) 3} net present value of the project (3 points} 4} internal rate of the project (3 points} 5} payback period (3 points} Extra credit (5 points} What is the maximum initial investment the company can make for the project to be acceptable? (if you proceed with this question, create a separate tab in Excel named \"extra credit\") ection Ill Year learly mark your answers 0 1 2 3 4 evenues 9,000 10,000 11,000 12,000 Cost of Goods Sold and other Expenses (4,000) (4,400) (4,800) (5,200) BITDA 5,000 5,600 6,200 6,800 Depreciation (4,000) (3,000) (2,000) (1,000) EBIT 1,000 2,600 4,200 5,800 f interest coverage ratio is Column1 Column2 Column3 > S to Rating is Spread is 12.50 100,000.00 Aaa/AAA 0.60% 9.50 12.50 Aa2/AA 0.80% 7.50 9.49 A1/A+ 1.00% 6.00 7.49 A2/A 1.10% 4.50 5.99 A3/A- 1.25% 4.00 4.49 Baa2/BBB 1.60% 3.50 3.9 Ba 1/BB+ 2.50% 3.00 3.49 Ba2/BB 3.00% 2.50 2.95 B1/B+ 3.75% 2.0 2.49 B2/B 4.50% 1.50 1.99 B3/B- 5.50% 1.25 1.49 Caa/CCC 6.50% 0.80 1.24 Ca2/CC 8.00% 0.50 0.79 C2/C 10.50% (100,000) 0.49 D2/D 14.00%
