Moonshine Holdings, Inc. intends to invest in two new operating divisions, a beer division and a sour mash distributorship division. While Moonshine is a publicly traded holding company, it does not possess an Equity Beta for either of its intended divisions. However, on the other hand, a number of proxies do exist in each industry, thus permitting Moonshine to establish a proxy beta for each of their two new operating divisions that is representative of only the operating characteristics of each of the divisions. However, the degree of leverage for each of the industry proxies are significantly different from each other and also from Moonshines target leverage for each of the two divisions

BEER DISTRIBUTORSHIP INDUSTRY

Company Equity Beta Mkt % of Debt/Value Mkt Capitalization as % of the Industry

A 0.13 21% 18%

B 0.64 58% 12%

C 1.00 65% 42%

D 1.08 79% 23%

E 0.94 62% 5%

Moonshine wishes to target a market-based Debt/Value ratio of 74% for their beer distributorship division, representative of principally long-term debt, the cost of the long-term debt for this division, estimated at 5.20%.

SOUR MASH DISTRIBUTORSHIP INDUSTRY

Company Equity Beta Mkt % of Debt/Value Mkt Capitalization as % of the Industry

A 0.75 26% 5%

B 0.60 4% 8%

C 0.88 58% 23%

D 1.46 79% 37%

E 0.38 14% 5%

F 0.95 65% 22%

For the sour mash division, Moonshine wishes to target a market-based Debt/Value ratio of 42%, again principally representative of long-term debt, the cost of the long-term debt for this division, is estimated at 4.90%.

A) Assuming a combined federal and state corporate tax rate of 30%, a long-term risk-free rate of 3.00%, an historical equity risk premium (or excess market return) of 7.43%, calculate Moonshines weighted after-tax cost of capital for each of the two divisions, as well as an overall corporate, composite weighted after-tax cost of capital, on the basis that the working/identifiable assets of the beer distributorship division represents 45% of the total working/identifiable assets of the two divisions.

B) Moonshine Holdings, Inc. is contemplating a vast corporate infrastructural investment of $1,600,000, with an estimated economic life of 10 years. It is intended to save the company $455,000, over the course of each year, in pre-tax cash operating expenses. The investments depreciation is estimated to be computed ratably (evenly) over the ten years to a zero salvage. A $125,000 commitment to working capital is required at the same time as the initial investment, with an additional amount of committed working capital of $65,000, required one year later. There is no intention to proceed further than the initial ten year investment horizon.

1) Should the investment be undertaken and please defend your conclusions.

2) Also please supply Bootleg with a sense of the investments performance return.