Case 2 Toyota's Hybrid Drive Svstems The main goal of this case is to reinforce your understanding of how to estimate the cost of capital in capital Once you finish learning Lecture 10 Estimating the Cost of Capital, you will be able to answer the questions I -3 below and ease 2 discussion questions (in the separate file "3. Case 2 Discussion Forum Instructions"). Once you finish Lecture I I Capital Budgeting and Valuation With Leserage, you will be able to answer the rest questions (#4 and and completely solve the case. Introduction As of late 2019, Toyota Motor Corporation has twelve engineering and manufacturing facilities in the United States. Recently, Toyota has been considering expanding the production Of their gas- electric hybrid drive SYStanS in the U. S. TO enable the expansion, they are contemplating investing Sl.5 billion at the end of 2020 (Year O) in a new plant with an expected 10-year life. In the meantime, they also need to invest million upfront in net working capital before the production Can take The projected financials ofthe new project for the Year I operation (2021) are as follows: Earnings before interest and taxes (EBIT Deprec iation expense: Increase in net working capital S170 million S 150 million million The anticipated unlevered free cash flows from the new plant will grow by 5% for each of the next two years (Years 2 and 3) and then year for the remaining seven years. AS a newly hired MBA in the capital budgeting division you have been asked to evaluate the new project using the WACC method. You will estimate the cash flows and compute the appropriate cost of capital and the net present values. You must seek out the information necessary to value the free cash flows but will be provided some directions to follow. Assume that marginal corporate tax rate is 40%. I. In excel, estimate the project's unlevered free cash flows from Y ear O to Y ear 10 (or equivalently from year 2020 to 2030, the end year of the project). A template is provided on 2. Determine the cost of equity rE and the cost of debt ro. a. For the cost of equity rE , i. Risk-free rate. Get the yield on the IO-year U.S_ Treasury Bond from the U.S. Department of the Treasury htt sJ/www_ \ resource-center/ data Select the following data and time period.