Hello, I am looking for help with the calculations in this case study.

DuraBike is a manufacturer of bikes that operates in New York. The company has been affected greatly by the COVID-19 pandemic - as the chief financial officer - you will have to act immediately as requested by the Board of Directors (BoD). Most prominently, DuraBike's market share and revenues have substantially decreased, with the demand for its bikes at low levels not seen since 2012.

To overcome the obstacles entailed by such situation, the marketing department has done an intensive research and suggested to launch an aggressive 10-year marketing campaign whereby the payment period to wholesale customers is extended from 30 to 60 days, together with other marketing strategies, leading to (forecasted) increase in sales of 21,900 bikes per year. While the bikes are selling at $620/unit on average, DuraBike can purchase its material from its supplier at $300/bike and is liable to pay its supplier in 60 days on average. Manufacturing and selling the bikes takes a total of 25 days on average. To accommodate the increase in demand due to the campaign, DuraBike would need to buy new machines costing $16,000,000 today, with a lifetime of 10 years (assume straight-line depreciation and 'zero' salvage value). Moreover, the marketing campaign will involve a cash cost of $4,000,000 per year.

As per the above forecasts and assume they remain the same every year, this 10-year campaign will be able to generate free cash flows of $2,585,600 per year (ignored the change in working capital). DuraBike currently has 80% equity and 20% debt in the balance sheet. Regarding the equity, DuraBike's shares have a beta coefficient of 1.4, while the risk-free rate is 2.5% and the expected return on market portfolio is 8.5%. On the liability side, DuraBike is paying an average before-tax interest rate of 8% per annum on its borrowings (the tax-rate in the U.S. is 30%).

Finally, to finance the strategy suggested by its marketing department, DuraBike must liquidate some investments due to tightened borrowing requirements. The company own two types of investments which can be sold: (i) Treasury bonds with $1,000 face value, 10 years to maturity, annual coupons of $50 and yield to maturity of 4% per year, and (ii) ordinary shares of another company, XYZ, which just paid a dividend of $0.50 per share, with dividend growth prospects of 5% per year and required rate of return of 10%.

Questions:

1. What are the impacts on operating cycle and cash conversion cycle due to the increase in the payment period (i.e., average collection period) from 30 to 60 days? Also, assuming the company is currently selling 100 bikes per day, by how much should the firm increase or reduce its working capital financing to accommodate to this change in average collection period?

1. Based on the forecasted sales, is it possible for DuraBike to achieve the corresponding cash and accounting break-even points? Based on your calculations for each - and from a pure cost management perspective - is the marketing department's proposal acceptable? Explain.

1.Calculate the weighted average cost of capital of DuraBike using available information (estimate the cost of equity using capital asset pricing model - CAPM).

1.Use Payback, Net-Present Value (NPV), and IRR to assess whether the investment in the new machines is warranted (assume a payback cut-off period of 7 years and use DuraBike's weighted average cost of capital as the discount rate). Also, explain to the BoD the benefits of the NPV vis-a-vis other capital budgeting methodologies.

1.If the market price of the Treasury bonds is currently at $1100 per unit, whereas the stock of XYZ is trading at $10 per share, which investment should DuraBike sell to raise the necessary funds? Explain the reasons behind your decision.