Longhorn Enterprises is a private start-up based in Austin, TX that will make high-end leather bags. It wants to launch its products in the U.S. and, as such, needs to build a manufacturing facility in New Mexico. Goal is to have plant for 5 years and then liquidate it in 2027 at 1.0x the 2027 ending balance of net PP&E + working capital. Longhorns investment will be $1,500K in capital expenditures plus $250K in net working capital which is comprised of ($1,000K) in accounts receivables (A/R) and inventories minus $750K in accounts payables (A/P) and accrued expenses.

The attached Excel spreadsheet shows all other required assumptions.

1. Attach model to Canvas submission. Instructor will check for structure/interactivity of model [10 points]

2. What is the projects NPV? [10 points]

3. Change the annual sales growth to 15% and gross margin to 25%. Whats the new NPV? [10 points]

4. Conduct a Goal Seek break-even analysis. What is the break-even gross margin required for this project to have a positive NPV? [10 points]

5. Conduct a 2x2 sensitivity analysis of sales growth (5%-15%) and gross margin (20%-40%). What conclusion do you make about this business case? [10 points]

Question 2 (20 points total)

NewCorp is a corporation of cosmetics and medical subsidiaries. The cosmetics subsidiary is worth $20M while the medical subsidiary is worth $30M. The firm has a debt-to-capitalization ratio of 50%. The tax rate for all firms is assumed to be 30%. The risk-free rate is 7% and the market risk premium is 6%.

The following information has been obtained for firms with comparable systematic risk:

Comparable Firms	Average	Average D/E Ratio
Cosmetics	0.9	20%
Medical	1.2	60%

Note that the average s above denote the average of the levered or equity s of these firms. Also, note that the combined entitys unlevered is the weighted-average of the unlevered s of its respective subsidiaries.

1. Calculate New Corps levered (10 points)

2. What is its cost of equity? (10 points)

Question 3 (20 points total)

You have been approached by the owner of a successful restaurant in Dallas who is raising $275,000 of new equity to fund the investments necessary to support anticipated growth over the next few years.

The restaurant owner tells you his restaurant will generate (in yr. 1) $1,000,000 in revenues and incur operating cash expenses of $650,000. He expects revenue and expenses to grow 2% in perpetuity. He also expects capital expenditures and depreciation each to be equal to 5% of sales. Working capital is 2% of sales.

You believe that the target capital structure is debt-free. The average tax rate is 25%. A review of comparable publicly-traded companies indicate a levered beta of 2.0 with average debt/(debt+equity) of 50%. The risk-free rate is 3.0% and market risk premium is 6.0%.

1. What is the expected rate of return on equity? [10 points]

2. What percentage of the equity in the restaurant would you expect if you were to provide the entire $275,000? [10 points]