ML., Inc. produces and sells soft drinks. The company is considering whether or not to offer a new, healthy drink called M's Lemonade. The company's chief financial officer has collected the following information about the firm and the proposed product: a. The company will have to purchase new equipment to produce the new product. The new equipment will cost the company $24 million. b. In anticipation of a potential new project, the company has already spent $250,000 to train workers to use the new equipment. c. The equipment will be depreciated on a straight-line basis to a $4 million book value in year 10 over its 10- year project life. It is anticipated that the equipment will in fact be sold for $4 million in year 10. d. To date, the company also spent $2 million to research the best formula for the drink (e.g. focus groups and surveys). e. The new drink is expected to generate sales revenue of $20 million per year for each of the next 10 years, of which 25% will be from lost sales of existing products. f. Because of the project, the company will need additional working capital of $1 million when starting the project, which can be recovered at the end of 10 years. From year 1 to year 9, no additional working capital is required g. The firm has already paid a consulting company $125,000 for analysis of the healthy drink market. h. The project of launching of the new drink will experience a manufacturing cost of $6 million every year from g. The firm has already paid a consulting company $125,000 for analysis of the healthy drink market. h The project of launching of the new drink will experience a manufacturing cost of $6 million every year from year 1 to year 10. i M.L.'s stock price is $32. They just paid a dividend of $2 and the market consensus is for constant 5% dividend growth forever. j. M.L.'s bonds sell for $902. They pay semi-annually; have 10 years to maturity, an annual coupon rate of 6% and par value of $1,000. k The company's marginal tax rate is 40%. 1 The target capital structure of the project is 60% equity and 40% debt. m. The new project is slightly more risky than the company's overall risk. The required rate of return on the project is 1% higher than the company's WACC. Please answer the following questions: 1. Find out the WACC of company. (1) What is the cost of debt? (2) What is the cost of equity? (3) What is the WACC? 2. Use the above information to estimate the cash flows of the project of the proposed new drink. (1) What are cash flows from the initial investment? (2) What are cash flows from working capital? (3) What are cash flows from cash flow from operations? (4) What are the project's total cash flows? 3. Assume that the firm needs to raise capital (the initial investment at year () to invest in the project. The floatation cost for debt is 3% and the floatation cost for equity is 5%. (1) What is the NPV of the project after adjusting for the floatation cost? (2) Should the company accept the project and why? ML., Inc. produces and sells soft drinks. The company is considering whether or not to offer a new, healthy drink called M's Lemonade. The company's chief financial officer has collected the following information about the firm and the proposed product: a. The company will have to purchase new equipment to produce the new product. The new equipment will cost the company $24 million. b. In anticipation of a potential new project, the company has already spent $250,000 to train workers to use the new equipment. c. The equipment will be depreciated on a straight-line basis to a $4 million book value in year 10 over its 10- year project life. It is anticipated that the equipment will in fact be sold for $4 million in year 10. d. To date, the company also spent $2 million to research the best formula for the drink (e.g. focus groups and surveys). e. The new drink is expected to generate sales revenue of $20 million per year for each of the next 10 years, of which 25% will be from lost sales of existing products. f. Because of the project, the company will need additional working capital of $1 million when starting the project, which can be recovered at the end of 10 years. From year 1 to year 9, no additional working capital is required g. The firm has already paid a consulting company $125,000 for analysis of the healthy drink market. h. The project of launching of the new drink will experience a manufacturing cost of $6 million every year from g. The firm has already paid a consulting company $125,000 for analysis of the healthy drink market. h The project of launching of the new drink will experience a manufacturing cost of $6 million every year from year 1 to year 10. i M.L.'s stock price is $32. They just paid a dividend of $2 and the market consensus is for constant 5% dividend growth forever. j. M.L.'s bonds sell for $902. They pay semi-annually; have 10 years to maturity, an annual coupon rate of 6% and par value of $1,000. k The company's marginal tax rate is 40%. 1 The target capital structure of the project is 60% equity and 40% debt. m. The new project is slightly more risky than the company's overall risk. The required rate of return on the project is 1% higher than the company's WACC. Please answer the following questions: 1. Find out the WACC of company. (1) What is the cost of debt? (2) What is the cost of equity? (3) What is the WACC? 2. Use the above information to estimate the cash flows of the project of the proposed new drink. (1) What are cash flows from the initial investment? (2) What are cash flows from working capital? (3) What are cash flows from cash flow from operations? (4) What are the project's total cash flows? 3. Assume that the firm needs to raise capital (the initial investment at year () to invest in the project. The floatation cost for debt is 3% and the floatation cost for equity is 5%. (1) What is the NPV of the project after adjusting for the floatation cost? (2) Should the company accept the project and why