Johnsons Acoustics (JA) is the market leader in acoustic equipment. As there is no major technological breakthrough in the acoustic industry, there is little growth in this industry. JA decides to diversify to a new business area: optical instruments. JA believes that, as the demand of optical lens for mobile phones is huge, the diversification will bring an excellent growth opportunity to the company. In the diversification plan, the optical instruments project will last for 5 years and a new factory will be built. The construction of the new factory requires $280 millions and it will be financed by issuing both common stocks and bonds. The information about the company's current capital structure is as follows: 1. The common stock is now trading at $15.65. We have used analysts' estimates to deter- mine that the market believes our dividends will grow at 6% per year and the expected dividend next year will be $2. The number of shares outstanding is 20 million. 230 2. The company's 20-year bonds that pay semi-annual coupon rate of 9% is now selling at $975. The face value of the bond is $1.000 and there are 100,000 bonds outstanding. The annual revenue, cost and profit forecast for the coming 5 years is as follows: $(Million) Revenue Variable cost 39 Fixed cost 35 Tax (35%) 54.6 Net Profit 101.4 Assume that Johnsons Acoustics has a 35% tax rate. At the end of year 5, an additional cost of S50 millions (net of tax) will be incurred. c. As optical instrument is a completely unrelated to the company's current business, the managers worry about the risk of the diversification strategy. They want to study how sensitive is the NPV to change in the cash flow estimate and hence a scenario analysis will be conducted. Two additional scenarios, namely, best scenario and worst scenario, will be considered. In the best scenario, the revenue and variable cost will be increased by 20%. In the worst scenario, the revenue and variable cost will be decreased by 20%. The fixed cost and tax rate remain unchanged in both scenarios. Compute the NPVs of the additional two scenarios. (10 marks)