Hi, I need the answer to problem 4 but I think I need to answer the problem number 3 first.
where none is specified. 1. You have been asked to estimate the expected earn- ings on a new store for Abercombie and Fitch. The net income each year for the next 10 years if the firm firm currently has 235 stores open and had total rev- has a tax rate of 40%. enues of $4.7 billion last year. The cost of goods sold, 4. Estimate the after-tax cash flows to equity each year not including depreciation, is 60% of revenues. The for the next 10 years on the International Harvester firm will have to make an initial investment of $10 factory. million in the new store, and the store will be depre- 5. You are analyzing a project with a life of five years, ciated straight line over 10 years to a salvage value of which requires an initial investment in equipment and zero. In addition, the firm has selling and advertising machinery of $10 million. The equipment is expected expenses of $470 million that are allocated equally to to have a five-year lifetime and no salvage value and existing stores. If the tax rate is 40% and the expected to be depreciated straight line. The project is expected inflation rate is 3%, estimate the after-tax operating to generate revenues of $5 million each year for the income on a new store each year for the next five five years and have operating expenses (not including years. depreciation) amounting to 30% of revenues. The tax 2. Abercombie and Fitch has working capital require- rate is 40%, and the cost of capital is 11%. ments that amount to 8% of revenues and invests in a. Estimate the after-tax operating income each year working capital at the beginning of each year. Fur- on this project. thermore, half of the selling and advertising expenses b. Estimate the after-tax operating cash flow each each year are fixed and are not expected to change year on this project. with the number of stores. Estimate the expected c. Assume that the firm that takes this project is los- after-tax operating cash flows on the new store for ing money currently and expects to continue los- Abercombie and Fitch each year for the next five ing money for the first three years. Estimate the years. after-tax operating income and cash flows on this 3. You have been asked to analyze a new factory being project. built by International Harvester. The factory will cost 6. You are considering a capital budgeting proposal to $50 million, and the firm will borrow $25 million on make "glow-in-the-dark" pacifiers for anxious first- a 10-year balloon payment loan, at a 7% interest rate. time parents. You estimate that the equipment to The factory is expected to generate $5 million in pre- make the pacifiers would cost you $50,000 (which tax operating income each year for the next 10 years, you can depreciate straight line over the lifetime of the after depreciation of $5 million a year. Estimate the project, which is 10 years) and that you can sell 15,000
