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 $69,000,000. 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 $2,050,000,000, 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 2021. FSC plans to run the plant for 10 years, and then sell it for 55% of its initial cost. When the plant starts up in January 2021, the initial fixed costs to run the facility is $125,000,000 per year. The fixed costs will then increase by 3.0% per year every year the plant is operational . FSC plans to make 3,000,000 chips the first year, and sell them for $400 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 7.5% each year. The variable costs are estimated to be 46% of the total revenue each year. There are 1,800,000,000 shares of common stock outstanding with a current price of $104.14 per share. FSC currently has 23,000,000 bonds outstanding with 15 years left to maturity that have a coupon rate of 4.95%, paid annually, and are currently trading at a quoted price of 107.53. To partially fund the project, FSC will have a new 20-year bond issue that will sell at a par value of S1000. Any new bonds issued will require 0.2% more YTM than the old bonds since the new bonds are junior to the old bonds. 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 2.6% and flotation cost of equity is 4.8%. The project will fall under the MACRS 10-year depreciation schedule. Annual net working capital required to support sales is $44 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 2021, it will require an additional $4,400 in net working capital on the balance sheet at the end of 2020). The firm's corporate income tax rate is 26% (21% Federal plus 5% Utah). Part A: Estimate the beta of FSC stock 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 9% and the most recent 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. Adjust the cost of debt of the old bonds to reflect the cost of debt of the new bonds. Part B: Compute the weights of debt and equity, and the weighted average cost of capital (WACC). Calculate the flotation costs associated with issuing new debt and equity, as well the total dollar value of new debt and equity to be issued. Part C: Create pro-forma income statements for the new manufacturing plant for the ten years it will be in operation (these should include sales revenue, fixed costs, variable costs, depreciation, EBIT, interest expense, EBT, taxes, and net income). Determine the net working capital required each year. Part D: Tabulate the relevant after-tax cash flows on a yearly basis and compute the Payback period, NPV, IRR, and MIRR (using the NPV, IRR, and MIRR functions, remember how to properly use the NPV function and the financing rate is the same as reinvestment rate). The firm typically uses a 4-year payback period cutoff. Indicate if FSC should accept the project for each decision rule. Part E: What is the minimum price FSC can initially charge (in 2021) and still accept the project? How high can variable costs go (as a percentage of sales revenue) and the project still be accepted? (Use the Solver in Excel to find these solutions.) 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 $69,000,000. 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 $2,050,000,000, 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 2021. FSC plans to run the plant for 10 years, and then sell it for 55% of its initial cost. When the plant starts up in January 2021, the initial fixed costs to run the facility is $125,000,000 per year. The fixed costs will then increase by 3.0% per year every year the plant is operational . FSC plans to make 3,000,000 chips the first year, and sell them for $400 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 7.5% each year. The variable costs are estimated to be 46% of the total revenue each year. There are 1,800,000,000 shares of common stock outstanding with a current price of $104.14 per share. FSC currently has 23,000,000 bonds outstanding with 15 years left to maturity that have a coupon rate of 4.95%, paid annually, and are currently trading at a quoted price of 107.53. To partially fund the project, FSC will have a new 20-year bond issue that will sell at a par value of S1000. Any new bonds issued will require 0.2% more YTM than the old bonds since the new bonds are junior to the old bonds. 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 2.6% and flotation cost of equity is 4.8%. The project will fall under the MACRS 10-year depreciation schedule. Annual net working capital required to support sales is $44 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 2021, it will require an additional $4,400 in net working capital on the balance sheet at the end of 2020). The firm's corporate income tax rate is 26% (21% Federal plus 5% Utah). Part A: Estimate the beta of FSC stock 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 9% and the most recent 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. Adjust the cost of debt of the old bonds to reflect the cost of debt of the new bonds. Part B: Compute the weights of debt and equity, and the weighted average cost of capital (WACC). Calculate the flotation costs associated with issuing new debt and equity, as well the total dollar value of new debt and equity to be issued. Part C: Create pro-forma income statements for the new manufacturing plant for the ten years it will be in operation (these should include sales revenue, fixed costs, variable costs, depreciation, EBIT, interest expense, EBT, taxes, and net income). Determine the net working capital required each year. Part D: Tabulate the relevant after-tax cash flows on a yearly basis and compute the Payback period, NPV, IRR, and MIRR (using the NPV, IRR, and MIRR functions, remember how to properly use the NPV function and the financing rate is the same as reinvestment rate). The firm typically uses a 4-year payback period cutoff. Indicate if FSC should accept the project for each decision rule. Part E: What is the minimum price FSC can initially charge (in 2021) and still accept the project? How high can variable costs go (as a percentage of sales revenue) and the project still be accepted? (Use the Solver in Excel to find these solutions.)