CougCare is an American retailer located in Pullman, WA. The company president is Paul Miller, who inherited the company. When the company was founded over 30 years ago, it originally focuses 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 Carson College of Business graduates, are hired by the company's finance department to evaluate a new project for the company.

As of now, CougCare's only game model is a strategy card game named the CougCompete (CGC), and sales have been excellent. CougCare's main competitor in the toy market is Hasbro, Inc (HAS). CougCare's CGC is similar to the Hasbro Monopoly model but with a more elaborate design. However, CougCare wants to incorporate a new card game model, the CougWin (CGW), into their lineup. CougCare spent $500,000 to develop the new CGW, which features a more complex structure, and more user friendly than the existing CGC game. The company has spent a further $120,000 on a marketing study to determine the new toy model's expected sales figures.

CougCare can manufacture the new model for $18 per game in variable costs. Fixed costs for the operation are estimated to run $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 $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, CougCare currently manufactures the CGC. Production of the existing product is expecting to be terminated in three years. If CougCare does not introduce the new CGW 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 CougCare 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. CougCare 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 8 percent.

2. The companys CEO, Paul, wants to understand the risk of the game industry better. Since CougCares main competitor, Hasbro, Inc (HAS), is a leading company in this industry, Paul asks you to perform the following analysis on HAS.

   1. Using the past N years of data (ending at 2020) 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?

   2. Provide your beta and alpha estimates, as well as the statistical significance (e.g. t ratio, p-value). Comment briefly.

   3. Plot the security characteristic line for this company. Clearly show alpha and beta on the diagram. Is the company correctly priced, overpriced or underpriced?

   4. 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?