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Martha 5. Wine, president of \"Santa m Rural Pig Farms\" {SE}, located in the US, is facing a bit of a crisis. The company specializes in selling equipment to pig farmers in continental Europe and in major competitor has rcceny launched a major advertising campaign that has been cutting into sales. Martha has decided to get down and dirty and ght back. She is considering a new project that will revolutionize farming. SE has developed a machine that catches eggs laid by chickens and moves them along a conveyor belt to a feeding station where pigs can eat the eggs. SE wants to market the idea to farmers on the basis that they can sell their pigs as \"Bacon and Eggs\". Martha 3. \"Wine hopes that the Bacon and Eggs project will provide 513 with windfall profits. They have dubbed the threeyear project \"W\". You knowthe following: A. The production for project Wig, is to take place at the firm's subsidiary in Schwcinfurt, Bavaria, Germany. B. Compared to the US, the pig farming industry in Germany is small and the only firms in the industry are all privately owned. As a result, you are unable to directly obtain an industry beta for the pig farming industry in Gcm1any. (3. Because SE only recently went public {its IPID was roughly IE months ago], there is insufficient return data for you to come up with a reasonable estimate of 53's equity beta. Instead, you can use information on the firm's competitors as a basis for your beta estimation {no additional risk adjustments are necessary]. You observe that: _m_ t] 5119 Total Ca-ital 5m 1539:] am You assume that firms in the German pig farming industry are nanced similarly to 313's US headquarters. D. In the past three years, the US and German stock markets have been fairly highly correlated {correlation coefficient = 0.7:\"). The stande deviation of German returns was l'lat'; during that time period 1I"ou believe that both of these figures will remain unchanged in the coming 3 years. E. The equipment needed for W costs E3,3l]t],l]l] in year t]. The firm employs a straightline depreciation method whereby every year it depreciates 33.33% of the equipment's book value. The firm estimates that the equipment has no salvage value at the end of the third year. F. The firm estimates that it will sell 500 machines in the first year, 700 in the second, and 600 in the third. Each machine will be priced at 615,000. Each machine will cost the firm 67,000 to produce. In addition, SB will have overhead costs of (200,000 per year. G. SB has no room in their current German factory to place the new equipment so they are planning on renting a 25,000 square foot warehouse from a local real estate development family, the Halsabschneiders. The cost for the warehouse is 6300,000 per year in year 1 and will increase by 12% per year afterwards. This cost is not included in the overhead costs in part F. H. Project Schwein will require that the firm increase net working capital (NWC) by (300,000 immediately and then maintain a balance equal to 10% of sales. At the end of the project, SB will recover all NWC (with no loss or gain). I. An outside consulting firm, Lomax and Co., conducted an 18 month marketing research study to determine whether consumers would purchase "Bacon and Eggs" in a single meat product. The cost to SB for the study was $400,000. To date, SB has only paid Lomax and Co. $320,000 and the remaining $80,000 is due at the end of the next year. J. You know that the firm is currently at its target capital structure. In addition, you have the following selected information about SB from their most recent balance sheet. (numbers in $ millions) Year 2019 Total Assets 830 Liabilities: Current Portion of Long Term Debt 0 Long - Term Debt 500 Equity: Paid in Capital 280 Common Equity 50K. The company has one German bond issue outstanding. Eight years ago, they issued 30-year bonds with a face value of (1,000. The firm originally issued 400,000 of these bonds but repurchased and retired 100,000 of them in the last three years. The bonds have a face value of (1,000. The current yield to maturity on these bonds is Page 3 Concordia University FINA 470 - International Finance Project 3 (Take-Home Final Project, Due Date: Sunday, December 6, 1 1:00pm) Prof. Thomas Walker, Ph.D. 7.8702% and each bond pays a semi-annual coupon of 642. L. The firm has 5,000,000 shares outstanding which currently sell for $100 per share. M. The risk free rate in both Germany and the US is 4%. You further know the following forecast (on which all investors agree) of the returns on the US market portfolio. The forecast is expected to remain unchanged each year for the next 3 years. Probability Return on the market 0.2 4% 0.5 15% 0.3 30% N. The firm has a tax rate of 35% in both Germany and the US.O. You recently observed that a new party, the so-called V-Partei', was founded in Germany (https://en.wikipedia.org/wiki/V-Partei3). You are concerned that if the party gains power during the upcoming Bavarian elections in 3 years, it will immediately (in year 3) expropriate your new factory and that all equipment, inventory, etc. will be lost. You expect the chance of this event (the combined likelihood of the election outcome and expropriation) to be 10%. P. As a result of its ongoing tariff dispute with the US, Germany's government has recently passed legislation whereby it imposes a tax of 20% on any repatriated profits to the US. Q. You observe the following information on the spot exchange rates and forward rates between the Euro and the US dollar: Spot rate: US$/E 1.40 1-Year forward rate: USS/( 1.50 2-Year forward rate: USS/E 1.60 3-Year forward rate: USS/E 1.70e.) What is the weighted average cost of capital (WACC) for project Schwein? Show your calculations.g. ) Complete the pro forma income statement for project Schwein. Use the template below. Specify the variables you use in the first column. (Note: there may be more rows than you need). Given that you are constructing the income statement for the purpose of a project evaluation, should you include interest expenses in your calculations? Why or why not? If your answer is no, how is the debt tax shield (the tax liability as a result of holding debt) accounted for? Year 1 Year 2 Year 3 Sales Revenue Cost of Goods Sold (aka Variable cost Fixed Costs (Overhead)