Fama Spaceships Corp. (FSC), in the course of developing a new spaceship, invented a new computer chip that can be used in a wide variety of communications applications. The research and development costs to make the chip operational was $27,000,000. FSC is now considering building a manufacturing plant for these computer chips and selling them to communications businesses (this results in no net change in the sales of spaceships). FSC management deems this project to be about as risky as the current firm as a whole. The manufacturing facility will cost $7,500,000,000, and will be built this year on property the firm already leases in the Silicon Slopes of Utah. The sale of the chips will start in 2022. FSC plans to run the plant for 10 years, and then sell it for 65% of its initial cost. When the plant starts up in January 2022, the initial fixed costs to run the facility is $1,050,000,000 per year. The fixed costs will then increase by 2.5% per year every year the plant is operational. FSC plans to make 13,500,000 chips the first year, and sell them for $375 each. FSC anticipates that sales will increase by 5.5% each year, but that they will have to decrease the price of the chips by 9% each year. The variable costs are estimated to be 46% of the total revenue each year. There are 2,600,000,000 shares of common stock outstanding with a current price of $127.52 per share. FSC currently has 75,000,000 bonds outstanding with 23 years left to maturity that have a face value of $1,000 and a coupon rate of 6.32%, paid annually, and are currently trading at a quoted price of 126.15% of par. To partially fund the project, FSC will have a new 30-year bond issue that will sell at a par value of $1000. The remainder of the plant will be financed with new equity. Debt and equity will be issued in a proportion that will maintain the current capital structure. The flotation cost of debt for FSC is 2.2% and flotation cost of equity is 4.3%. The project will fall under the MACRS 20-year depreciation schedule. Annual net working capital required to support sales is S65 per unit produced and needs to be on the balance sheet at the end of the year PRIOR to the sales it is supporting (for example, if an additional 100 chips are made in 2022, it will require an additional $6,500 in net working capital on the balance sheet at the end of 2021). The firm's corporate income tax rate is 26% (21% Federal plus 5% Utah). Part A: Estimate the beta of FSC stock by performing a regression using the stock price data given in the FSC spreadsheet, Stock and Market Data tab (Hint: remember to use stock returns not prices). Assuming the expected return on the market is 12.5% and the YTM of the 10-year Treasury bond is the annual risk-free rate, compute the cost of equity using the CAPM. Compute the cost of debt of the old bonds using Excel's RATE function. Date S&P500 Pric SC Stock Pric 10-year Treasury Yield Apr-16 $ 187.69 $ 53.09 1.819% May-16 $190.88 55.38 1.834% Jun-16 $190.55 $ 58.00 1.488% Jul-16 $198.53 $ 61.64 1.458% Aug-16 $198.77 $ 63.47 1.568% Scp-16 $ 137.78 $ 67.26 1.608% Oct-16 $ 195.33 $ 62.13 1.8343 Nov-16 $ 202.53 $ 61.83 2.368% Dec-16 205.42 $ 65.11 2.446% Jan-17 $ 210.33 $ 66.10 2.451% Feb-17 218.59 $ 64.99 2.358% Mar-17 $ 217.92 $ 65.22 2.396% Apr-17 $ 221.04 $ 65.36 2.282% May-17 $ 224.16 $ 65.29 2.196% Jun-17 224.49 $ 61.46 2.302% Jul-17 $ 230.23 $ 64.61 2.292% Aug-17 $ 230.30 $ 63.88 2.121% Scp-17 $234.39 69.88 2.326% Oct-17 $ 241.10 $ 83.48 2.376% Nov-17 248.47 $ 82.29 2.417% Dec-17 $ 250.20 $ 85.21 2.405% Jan-18 $265.66 $ 88.87 2.720% Feb-18 $256.00 $ 90.99 2.868% Mar-18 $ 247.99 $ 96.79 2.741% Apr-18 $250.27 $ 95.94 2.936% May-18 $ 256.35 $ 102.59 2.822% Jun-18 $256.67 $ 92.92 2.849% Jul-18 $267.38 89.91 2.964% Aug.18 $ 275.91 $ 90.53 2.853% Sep-18 $ 276.30 $ 88.94 3.056% Oct-18 258.37 $ 88.17 3.159% Nov-18 $ 263.16 $ 92.74 3.013% Dec-18 $238.60 $ 88.81 2.686% Jan-19 $ 259.21 $ 89.17 2.635% Feb-19 $267.61 $ 100.23 2.7112 Mar-19 $ 271.26 $ 102.27 2.4143 Apr-19 $ 283.58 $ 97.20 2.509% May-19 $ 265.50 $ 83.87 2.142% Jun-19 $ 282.60 91.73 2.000% Jul-19 $288.27 96.86 2.021% Aug-19 $ 283.44 $ 90.84 1.506% Scp-19 $ 287.63 $ 99.41 1.675% Oct-19 $ 295.35 $ 109.05 1.6912 Nov-19 $ 306.04 $ 111.38 1.776% Dec-19 $ 313.39 $ 116.09 1.919% Jan-20 $ 314.80 $ 124.01 1.520% Feb-20 $289.88 $ 107.69 1.127% Mar-20 $ 252.20 $ 105.49 0.698% Apr-20 $285.90 $ 116.92 0.622% May-20 $ 233.52 $ 122.67 0.648% Jun-20 $ 303.49 $ 117.28 0.653% Jul-20 $ 322.78 $ 93.56 0.536% Aug-20 $ 345.31 $ 99.88 0.693% Scp-20 $ 331.05 $ 102.19 0.677% Oct-20 $ 324.09 $ 87.39 0.860% Nov-20 $ 359.35 $ 95.42 0.844% Dec-20 $ 371.08 $ 99.04 0.917% Jan-21 $ 368.86 $ 110.35 1.093% Feb-21 $ 379.12 $ 120.83 1.460% Mar-21 $ 388.21 127.52 1.732% Fama Spaceships Corp. (FSC), in the course of developing a new spaceship, invented a new computer chip that can be used in a wide variety of communications applications. The research and development costs to make the chip operational was $27,000,000. FSC is now considering building a manufacturing plant for these computer chips and selling them to communications businesses (this results in no net change in the sales of spaceships). FSC management deems this project to be about as risky as the current firm as a whole. The manufacturing facility will cost $7,500,000,000, and will be built this year on property the firm already leases in the Silicon Slopes of Utah. The sale of the chips will start in 2022. FSC plans to run the plant for 10 years, and then sell it for 65% of its initial cost. When the plant starts up in January 2022, the initial fixed costs to run the facility is $1,050,000,000 per year. The fixed costs will then increase by 2.5% per year every year the plant is operational. FSC plans to make 13,500,000 chips the first year, and sell them for $375 each. FSC anticipates that sales will increase by 5.5% each year, but that they will have to decrease the price of the chips by 9% each year. The variable costs are estimated to be 46% of the total revenue each year. There are 2,600,000,000 shares of common stock outstanding with a current price of $127.52 per share. FSC currently has 75,000,000 bonds outstanding with 23 years left to maturity that have a face value of $1,000 and a coupon rate of 6.32%, paid annually, and are currently trading at a quoted price of 126.15% of par. To partially fund the project, FSC will have a new 30-year bond issue that will sell at a par value of $1000. The remainder of the plant will be financed with new equity. Debt and equity will be issued in a proportion that will maintain the current capital structure. The flotation cost of debt for FSC is 2.2% and flotation cost of equity is 4.3%. The project will fall under the MACRS 20-year depreciation schedule. Annual net working capital required to support sales is S65 per unit produced and needs to be on the balance sheet at the end of the year PRIOR to the sales it is supporting (for example, if an additional 100 chips are made in 2022, it will require an additional $6,500 in net working capital on the balance sheet at the end of 2021). The firm's corporate income tax rate is 26% (21% Federal plus 5% Utah). Part A: Estimate the beta of FSC stock by performing a regression using the stock price data given in the FSC spreadsheet, Stock and Market Data tab (Hint: remember to use stock returns not prices). Assuming the expected return on the market is 12.5% and the YTM of the 10-year Treasury bond is the annual risk-free rate, compute the cost of equity using the CAPM. Compute the cost of debt of the old bonds using Excel's RATE function. Date S&P500 Pric SC Stock Pric 10-year Treasury Yield Apr-16 $ 187.69 $ 53.09 1.819% May-16 $190.88 55.38 1.834% Jun-16 $190.55 $ 58.00 1.488% Jul-16 $198.53 $ 61.64 1.458% Aug-16 $198.77 $ 63.47 1.568% Scp-16 $ 137.78 $ 67.26 1.608% Oct-16 $ 195.33 $ 62.13 1.8343 Nov-16 $ 202.53 $ 61.83 2.368% Dec-16 205.42 $ 65.11 2.446% Jan-17 $ 210.33 $ 66.10 2.451% Feb-17 218.59 $ 64.99 2.358% Mar-17 $ 217.92 $ 65.22 2.396% Apr-17 $ 221.04 $ 65.36 2.282% May-17 $ 224.16 $ 65.29 2.196% Jun-17 224.49 $ 61.46 2.302% Jul-17 $ 230.23 $ 64.61 2.292% Aug-17 $ 230.30 $ 63.88 2.121% Scp-17 $234.39 69.88 2.326% Oct-17 $ 241.10 $ 83.48 2.376% Nov-17 248.47 $ 82.29 2.417% Dec-17 $ 250.20 $ 85.21 2.405% Jan-18 $265.66 $ 88.87 2.720% Feb-18 $256.00 $ 90.99 2.868% Mar-18 $ 247.99 $ 96.79 2.741% Apr-18 $250.27 $ 95.94 2.936% May-18 $ 256.35 $ 102.59 2.822% Jun-18 $256.67 $ 92.92 2.849% Jul-18 $267.38 89.91 2.964% Aug.18 $ 275.91 $ 90.53 2.853% Sep-18 $ 276.30 $ 88.94 3.056% Oct-18 258.37 $ 88.17 3.159% Nov-18 $ 263.16 $ 92.74 3.013% Dec-18 $238.60 $ 88.81 2.686% Jan-19 $ 259.21 $ 89.17 2.635% Feb-19 $267.61 $ 100.23 2.7112 Mar-19 $ 271.26 $ 102.27 2.4143 Apr-19 $ 283.58 $ 97.20 2.509% May-19 $ 265.50 $ 83.87 2.142% Jun-19 $ 282.60 91.73 2.000% Jul-19 $288.27 96.86 2.021% Aug-19 $ 283.44 $ 90.84 1.506% Scp-19 $ 287.63 $ 99.41 1.675% Oct-19 $ 295.35 $ 109.05 1.6912 Nov-19 $ 306.04 $ 111.38 1.776% Dec-19 $ 313.39 $ 116.09 1.919% Jan-20 $ 314.80 $ 124.01 1.520% Feb-20 $289.88 $ 107.69 1.127% Mar-20 $ 252.20 $ 105.49 0.698% Apr-20 $285.90 $ 116.92 0.622% May-20 $ 233.52 $ 122.67 0.648% Jun-20 $ 303.49 $ 117.28 0.653% Jul-20 $ 322.78 $ 93.56 0.536% Aug-20 $ 345.31 $ 99.88 0.693% Scp-20 $ 331.05 $ 102.19 0.677% Oct-20 $ 324.09 $ 87.39 0.860% Nov-20 $ 359.35 $ 95.42 0.844% Dec-20 $ 371.08 $ 99.04 0.917% Jan-21 $ 368.86 $ 110.35 1.093% Feb-21 $ 379.12 $ 120.83 1.460% Mar-21 $ 388.21 127.52 1.732%