How would the evolution of thecapital structureof LGI be assessed? Reflecting on Project 1, is the risk exposure under control? If not, recommendations can be made? How did the currentWACCin Project 5 depart from the firm's state in Project 1?

Project 1 Data

estimate 2020 2019 2018: competitor 2020 2019 2018 Liabilities and Stockholders' Assets: Equity: Cash and marketable securities 228 366 169 Accounts payable and accruals 361 324 312 Accounts receivable 188 181 157: Notes payable 140 103 61 Inventory 404 398 349 Accrued taxes 56 88 109 Other current assets 18 10 Total current liabilities 557 515 482 Total current assets 838 955 680 Property, plant, and equipment 4000 3358 2976 Long-term debt 457 379 283 Less: Accumulated depreciation 2000 1826 1608 Total liabilities 1014 894 765 Net property, plant, and equipment 2000 1532 1368 Common Stock (98,051,400 shares) 490 487 483 Goodwill and other assets 1280 1280 1280 Additional Paid-in capital 2439 2222 1982 Retained earnings 270 179 98 Total assets 4118 3767 3328 Treasury stock -95 -15 Total stockholders' equity 3104 2873 2563 Total liabilities and equity 4118 3767 3328 # of shares 98051400 97302600 96521200 estimate 2020 2019 2018 competitor Sales (net sales) $2,013 $2,450 $2,733 7564 Cost of goods sold 1400 1689 1765 3883 Gross profit 613 761 968 3681 Selling, general, and administrative expenses 125 98 91: 105 Earnings before Interest, taxes, depreciation, and amortization (EBITDA) 488 663 877 3576 Depreciation and amortization 174 218 259 743 Earning before interest and taxes (EBIT) Operating income (loss) 314 445 618 2833 Interest expense 141 137 125 207 Earnings before taxes (EBT) 173 308 193 2626 Taxes (34%) 59 105 168 893 Net earnings (loss)/Net Income 114 203 325 17332020 2019 2018 Industry Benchmark Liquidity Ratios Current ratio 1.50 1.85 1.41 1.92 Quick ratio 0.78 1.08 0.69 1.25 Cash ratio 0.41 0.71 0.35 .86 Efficiency Ratios 2020 2019 nventory turnover ratio 4.98 6.16 7.83 5.37: Operating Activities Days' sales in inventory 73.25 114 203 59.29 46.61 50.6 Net income Accounts receivable turnover Additions (sources of cash) 10.71 13.54 17.41 18.12 Depreciation 174 218 Days' sales outstanding 34.09 26.97 20.97 21.5 Increase in accounts payable 37: 12 Total asset turnover (TAT) 0.49 0.65 0.82 0.9 Subtractions (uses of cash) Fixed assets turnover 0.50 0.73 0.92 2.75 : Increase in accounts receivable -7: -24 Leverage Ratios Decrease in accrued income taxes -32 -21 Total debt ratio 0.25 Increase in other current assets - 8 -5 0.24 0.23 0.21 Debt to equity ratio -6: 0.33 0.31 0.30 0.27 Increase in inventories -49 Equity multiplier (EM) 272 334 1.33 1.31 1.23 Net cash provided by operating activities 1.30 imes interest earned Long-Term Investing Activities 2.24 1.32 10.13 5.5 Cash coverage Increase in property equipment -642 -382 9.3 Decrease in goodwill and other assets 0 Profitability Ratios Net cash used in investing activities -642 382 Profit Margin (PM) 0.06 .08 0.12 0.14 Financing Activities Gross profit margin 0.30 .31 0.35 0.48 Increase in notes payable 37 42 Operating profit margin 78 96 0.06 0.08 0.12 0.24 Increase in long-term debt BIT return on assets (EROA) 220 0.08 0.12 .19 Sale of common stock 244 .19 Payment of cash dividends -23 122 ROA 0.03 0.05 0.10 0.17 Purchase of treasury stock -80 -15 0.04 0.07 0.13 0.15 Net cash provided by financing activities 232 2451 Market Value ratios (*) (sum of 3 CFs) 138 197 Earning per share (EPS) 0.23 0.42 0.67 138 197 n.a. Net increase in cash and marketable securities rice-earnings ratio 0.1 0.14 0.15 n.a. Cash and marketable securities at beginning of DuPont Equation year PM Cash and marketable securities at end of year 0.06 0.08 0.12 0.14 AT 0.49 0.65 0.82 0.9 all grey cells need to be filled EM 1.33 1.31 1.30 1.23 ROE 0.04 0.07 0.13 0.15: ") Price per share 65 68 71Payback Table View Table 1 - Data Cost of new manufactoring equipment (at year=0) 191.1 million Corporate income tax rate - Federa 21.0% Corporate income tax rate - State of Maryland 8.0% Discount rate for the project (per Project 4) 5.00 Loan Amount (90% of purchase price) 171.99 million Loan Interest rate (Prime + 2) 5.25% Table 2 - After-tax Cash Flow Table (all figures in $ millions) Projected Cash Projected Cash Projected Projected Year Outflows from Depreciation Interest Projected Inflows from Taxable Federal State Projected PV NPV IRR Expense NPV2 Operations Operations Expense Income Income Income After-tax . . . . ." - . . . .. Taxes Taxes Cash Flows + Excel function to use : - . . . . . . ... . . . ..."."" . . . . . . . .. SLN IMPT PV NPV IRR NPV 0 ($191.1) ($191.1) $850.0 840.0 $23. $9.0 $22.9 ($4.8 $1.8 $7.6 $7.2 $73 $900.0 $810.0 $23.9 $8.1 $58.0 $ 12.2 $4.6 $65.1 : $57.9 $59.09 $990.0 870.0 $23.9 $7.1 $89.0 $18.6 $7.1 $87.1 $73.1 $753 $1,005.0 $900.0 $23.9 $6.1 $75.0 $15.8 $6.0 $77.2 $61.1 $63.6 $1,200.0 $1,100.0 $23.9 $5.0 $71.1 $14.9 $5.7 $74.4 $55.6 $58.4 $1,300. $1,150.0 $23.9 3.8 $122.3 $25.7 $9.8 $1 10.7 $78.0 $82.9 $1,350.0 $1,300.0 $23.9 $2.6 $23.5 $4.9 $1.9 $40.6 $27.0 $1,320.0 $1,300.0 $28.9 $23.9 $1.3 ($5.2) ($1.1) ($0.4) $20.2 $12.7 $13.7 PV $372.6 $389.2 NPV; - calculated NPV including interest expense NPV $181.5 $181.5 $198.1 NPV2 - calculated NPV from Project 4 at the lower discount rate of 4.95% IRR 24.68% 24.68% Payback Timeline View o 1 2 Cash Flow ($191.1) $7.6 $65.1 $87.1 $77.2 $74.4 $110.7 $40.6 $20.2 Cummulative Cash Flow ($191.1) ($183.5) ($118.4) ($31.3) $45.8 $120.2 $231.0 $271.5 Payback Period 13 months 2 3 PV ($191.1) Discounted Cash Flow (DCF) ($191.1) $7.2 $57.9 $73.1 $61.1 $55.6 $78.0 $27. $12.7 $372.6 $181.5 Cummulative DCF ($191.1) ($183.9) ($126.0) ($52.9) $8.2 $63.8 $141.9 $168.9 $181.5 Payback Perio 10 monthLargo Gobal Income Statement of December 31 (millions) ACTUAL BUDGET FORECAST 2020 2021 2022 2023 2024 Sales (net sales) $2,013 $2,114 $2,219 $2,330 $2,447 Cost of goods sold 1400 1428 1457 1486 1515 Gross profit 613 686 763 845 931 Selling, general, and administrative .. .. 125 128 131 134 expenses 137 Earnings before Interest, taxes, depreciation, and amortization 488 558 632 711 795 (EBITDA) 2. . Depreciation and amortization 174 198 222 246 270 Earning before interest and taxes 314 360 410 465 525 (EBIT) Operating income (loss) Interest expense 141 150 149 148 147 Earnings before taxes (EBT) 173 210 261 $ 317 378 59 71 89 108 129 Taxes (34%) S 114 139 209 Net earnings (loss)/Net Income 172 249CAPM = Risk Free Rate + Beta x Market Premium CAPM = RR + (B X (RM - RF)) 1.28% B 1.12 RM 6.00% = CAPM 6.57% 2 WACC Information from Largo Global a. As of today, Largo Global market capitalization (E) is $6,373,341,000.' b. Largo Global's book value of debt is $539,500,000.2 c. Cost of Equity = CAPM from question 1 d. Cost of Debt = Last Fiscal Year End Interest Expense' / Book Value of Debt (D). e. Use the tax rates given in Project 4 Tab 3. Market value of equity (E), also known as market cap, is calculated using the following equation: Market Cap = Share Price x Shares Outstanding from Project 1 2 Book value of debt (D) is calculated as follows: Book Value of Debt = Last 2-Year Avg of Notes Payable + Last 2 Year Avg of Long-Term Debt from Project 1. 3 From Project 1 WACC - Re - - Rd . (1 - To 6,373,341,000 D 539,500,000 Where: cost of equity Total Capital (V) 6,912,841,000 de cost of debt = market value of the firm's equity Last Fiscal Year End = market value of the firm's debt $141,000,000 V = E + D = total market value of the firm's financing (equity and debt) Interest Expense of financing that is equity D/V = percentage of financing that is debt Tax Rate (Te) 29.000% Ic = corporate tax rate WACC = (Equity / Total Capital) " Cost of Equity + (Debt / Total Capital) " Cost of Debt " (1 - Tax kate) 1. Find the weight of equity - E / (F + D)) 92.196% 2. Find the weight of debt - D / (1 + D)). 7.804% Re 3. Find the cost of equity using C'APM. 6.57% Rd 4. Find the cost of debt. 26.135% WACC 5. Find the weighted average cost of capital. 7.51%2020 2019 2018 2020 2019 2018 % of Assets change % of Assets change % of Assets % of Assets change % of Assets change % of Assets Liabilities and Assets: Stockholders' Equity: Accounts payable and Cash and marketable securities 5.54% -138 9.72% 197 5.08% accruals 8.77% 37 8.60%: 12 9.38% Accounts receivable 4.57% 4.80% 24 4.72% Notes payable 3.40% 37 2.73% 42 1.83% aventory 9.81% 10.57% 49 10.49% Accrued taxes 1.36% -32 2.34% -21 3.28% Total current Other current assts 0.44% 0.27% 0.15% 13.53% 42 13.67%: 33 14.48% Total current assets 20.35% 117 25.35% 275 : 20.43% roperty, plant, and equipment 97.13% 542 89.14% 382 89.42% Long-term debt 11.10% 78 10.06% 96 8.50% ess: Accumulated depreciation 48.57% 174 48.47% 218; 48.32% Total liabilities 24.62% 120 23.73% 129 22.99% Common Stock let property, plant, and equipment 48.57% 468 40.67% 164 41.1 1% (98,051,400 shares) 11.90% 3 12.93% 14.51% Goodwill and other assets 31.08%; 33.98% 38.46% capital 59.23% 217 58.99% 240 59.56% Retained earnings 6.56% 91 4.75% 81 2.94% Total assets 100% 351 100% 439 100% Treasury stock -2.31% -80 0.40%: -15 0.00% Total stockholders' equity 75.38% `231 76.27% 310 77.01% Total liabilities and equity 100% 351 100%: 439 100% 2020 2019 2018 % of Sales change % of Sales change % of Sales et sales 100% 100.00% -283 100% ost of goods sold 69.55% 289 68.94% -76 64.58% ross profit 30.45% -148 31.06% -207 35.42% elling, general, and administrative 27 penses 6.21% 4.00% 3.33% arnings before Interest, taxes, epreciation, and amortization 24.24% -175 BITDA) 27.06% 214 32.09% epreciation and amortization 8.64% -44 8.90% 41 9.48% arning before interest and taxes BIT) Operating income (loss) 15.60% -131 18.16% -173: 22.61% terest expense 7.00% 5.59% 12 4.57% arnings before taxes (EBT) 3.59% -135 12.57% 185 18.04% axe 2.93% 46 4.29% 63 6.15% let earnings (loss)/Net Income 5.66% -89 8.29% -122 11.89%