In this final assignment, you are asked to answer several

questions regarding a potential business idea $($described

below$).$ Apply all that you have learnt throughout the course to

answer the questions $-$ and good luck!

A small bookstore on Gran Via, one of the main arteries through

Madrid and a famous shopping street, has come up with the idea

of delivering books to visitors to Madrid who stay in local

hotels. Given the central location of the bookstore, the books

would be delivered to tourists staying in nearby hotels within

less than $30$ minutes.

The idea for the delivery service originally came from five MBA

students at IE Business School who conducted a market study

into the potential need for such a service. From personal

experience, the students knew that it is easy to forget one's

current book at home while travelling. The five MBA students

spent last summer interviewing local tourists about the

desirability of such a service. Manuel Mu$$oz$,$ the bookstore

owner, sponsored this market study with $in1,250.$ The market

study also revealed that Amazon were planning to set up a

similar delivery service in eentral Madrid. Due to various

administrative delays, Amazon would only be able to start its

delivery service in exactly $3$ years from now. It would then

immediately price Manuel's bookstore out of the market.

The bookstore would need to buy two electric bicycles for the

delivery people at a price of $1,500$ each. The two bicycles

would be fully depreciated in a straight line over the three years.

They could be sold for $e400$ each at the end of the project. The

bookstore would also need to use an empty room at the back of

the store as a storeroom. If the bookstore were not to go ahead

with the delivery service, the empty room could be rented out at

a monthly rent of $2,000.$ The storage room would require

heavy$-$duty metal shelves at a total cost of $4,000.$

If going ahead, Manuel wants to advertise the new delivery

service by distributing leaflets to nearby hotels. He has been

quoted a fee of $15,000$ for the design of various promotional

items and another $3,200$ for the printing of sufficient leaflets

and other promotional items $($such as free cupholders$)$ to last for

the next three years.

The two delivery people needed for the delivery service would

be paid $16,000$ p$.$a$.$ However, Manuel expects to relocate an

existing employee who already works for the bookstore to the

delivery service. This employee currently earns $15,000p.$a$.$

The new delivery service would generate sales of $750$ books,

$1,000$ books and $1,200$ books each month during the first year.

the second year and the third year, respectively. The average

sales price of the books would be $20.$ The cost of the books

sold is $75\%$ of their sales price to the customers. Manuel expects

that the number of books sold instore would drop by $25\%$ of the

number of books sold via the delivery service. The average sales

price per book for the eroded sales is $15$ and the cost of the

books sold is $80\%.$ The bookstore pays $30\%$ of tax on its.

profits.Manuel is somewhat confused about his cost of capital. He

knows that he should not rely on the bookstore's historic cost of

debt. He therefore phoned up his bank manager who quoted him

an interest rate of $7\%$ if he were to take out a loan today.

Following some extensive research on the internet, he is pretty

sure that the equity beta of his bookstore is roughly $1\mathrm{.}3.$ He

asked one of his regular customers, a finance professor at IE$,$

what risk premium he should use for the market premium. The

professor suggested to use a market risk premium of $5\mathrm{.}8\%$ p$.$a$.$

However, Manuel does not know what rate to use for the risk$-$

free rate. He looked up the yields on various debt securities

issued by the Spanish government and he found the following:

Debt security

$3-$monch bills

$1-$year bills

$3-$year boows

$5-$year bonos

$10-$year bonos

Current vield

$1\mathrm{.}820\%$

$2\mathrm{.}655\%$

$2\mathrm{.}746\%$

$2\mathrm{.}952\%$

$3\mathrm{.}384\%$

Note: The Spanish word for boved is "bovo".

The bookstore is currently financed by $35\%$ of debt and $65\%$ of

equity. The new project is expected to require the same capital

structure or mix of debt and equity as the entire bookstore.

Net working capital of $12\%$ of the annual sales revenue would

need to be in place at the start