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Mini Case: Prime Beverage Inc. Corporation's Capital Structure and Investment Decision Background: Prime Beverage Inc. is a beverage company founded in UK . It has
Mini Case: Prime Beverage Inc. Corporation's Capital Structure and Investment Decision
Background:
Prime Beverage Inc. is a beverage company founded in UK It has carved out a distinct niche for itself in the beverage industry by providing a diverse array of alcoholic drinks infused with allnatural flavors. Presently, the board is contemplating an expansion of its product offerings to include organic juices and energy drinks. These ventures require a substantial amount of capital to commence product research and acquire new manufacturing facilities. At this moment, CEO and CFO need to provide recommendations to the board and assess the feasibility of the two investment projects.
Capital Structure Analysis:
Primes current capital structure consists of equity and debt. Its equity consists of common shares. The company is considering whether to increase its debttoequity ratio to debt and equity. The company has beta. Its years bond is sold at $ with semi annual coupon rate.
Additional Information:
The corporate tax rate is
Market premium is
Risk free return rate is
Investment Projects:
Project A: This project involves finalizing R&D and expanding production capacity for new product line which is estimate to generate $ million, $ million, $ million, $ million and $ million annual cash flows for the next five years. The initial investment required for this project is $ million.
Project B: Project B requires diversifying into an energy drink. It is riskier as the company has non energy drink industry expertise. However, it has the potential to generate higher returns. It is expected to cost $ million and produce cash flows of $ million per year for the next five years with no salvage value.
Questions:
Calculate the company's both WACCs under Prime old and new capital structures. Explain why it increases or decreases.
Calculate the Net Present Value NPV IRR, Cash Payback and Discounted Cash Payback with new capital structure for both Project A and Project B Provide a rationale for your investment recommendation.
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