Most Likely

May you confirm all of the above is correct, Thank you!

The new Designer Womens Tops was expected to sell for $ 105 per unit and had projected sales of 5900 units in the first year, with a projected (Most-Likely scenario) 21.0 % growth rate per year for subsequent years. A total investment of $ 958,000 for new equipment was required. The equipment had fixed maintenance contracts of $ 237,154 per year with a salvage value of $ 145,042 and variable costs were 9 % of revenues. Shantel also needed to consider both the Best-Case and Worst-Case scenarios in the analysis with growth rates of 31.00 % and 2.10 % respectively.

The new equipment would be depreciated to zero using straight line depreciation. The new project required an increase in working capital of $ 243,840 and $ 26,822 of this increase would be offset with accounts payable.

PSUWC currently has 940000 shares of stock outstanding at a current price of $ 75.00. Even though the company has outstanding stock, it is not publicly traded and therefore there is no publicly available financial information. However, after analysis management believes that its equity beta is 1.38.

The company also has 120000 bonds outstanding, with a current price of $ 945.00. The bonds pay interest semi-annually at a coupon rate of 5.60 %. The bonds have a par value of $1,000 and will mature in 12 years. The average corporate tax rate was 30 %.

Management believes the S&P 500 is a reasonable proxy for the market portfolio. Therefore, the cost of equity is calculated using the company's equity beta and the market risk premium based on the S&P 500 annual expected rate of return - Shantel would calculate the monthly expected market return using 5 years of past monthly price data available in the worksheet Marketdata. This would then be multiplied by 12 to estimate the annual expected rate. Shantel remembered that if the expected rate of return for the market was too low, too high, or negative, a forward looking rate of an historical average of about 9.5% would have to be used, as the calculated value for the current 5-year period may not be representative of the future. Shantel would consider a E(Rm) between 8-12% acceptable. Shantel would calculate the market risk premium: E(Rm) - Rf from the previous calculations using the risk-free rate data available in the worksheet Marketdata. Shantel noted that the risk-free rate was on an annual basis.

Shantel needed to calculate the rate at which the project would have to be discounted to calculate the Net Present Value (NPV) of the proposed project based on the decision of raising capital and the current capital market environment. This discount rate, the WACC, would obviously influence the NPV and could affect the decision of whether to accept or reject the project.

0 1 2 3 4 $ $ (958,000.00) (217,018.00) 5900 105.00 619,500.00 $ $ $ 6023.9 105.00 632,509.50 $ $ 6150.4019 105.00 $ 645,792.20 $ 6279.56034 105.00 659,353.84 $ Timeline: Year II. Net Investment Outlay = Initial CFs Price of Equipment Change in NWC III. Cash Flows from Operations Revenue Generation Unit Sales Unit Sale Price Revenues Costs Variable Costs Fixed Costs Depreciation Earnings Before Taxes Taxes Net Income Depreciation Net operating CFS IV. Terminal Cash Flows Salvage Value Tax on Salvage Value Return of NWC V. Final Cash Flow Cash Flows Present Value of CFs 55,755.00 $ 237,154.00 $ 203,239.50 $ 123,351.50 $ 37,005.45 $ 86,346.05 $ 203,239.50 $ 289,585.55 $ 56,925.86 $ 237,154.00 $ 203,239.50 $ 135,190.15 $ 40,557.04 $ 94,633.10 $ 203,239.50 $ 297,872.60 $ 58.121.30 $ 237,154.00 $ 203,239.50 $ 147,277.40 $ 44,183.22 $ 103,094.18$ 203,239.50 $ 306,333.68 $ 59,341.85 237,154.00 203,239.50 159,618.49 47,885.55 111,732.94 203,239.50 314,972.44 145 2.00 $ $ $ $ $ $ $ $ $ $ $ 217,018.00 (1,175,018.00) $ $ $ $ 289,585.55 267,169.99 $ $ 297,872.60 $ 253,543.29 $ 306,333.68 $ 240,562.04 $ 677,032.44 490,515.36 NPV of Project $ 76,772.69 Summarize Answers for NPV under three cases in area below Sales Growth Rate NPV Accept? Best Case 31.0% $721,053 Most Likely 21.00% $76,773 Worst Case 2.1% $473,127 $ $ 243,840.00 217,018.00 237.154.00 $ 9% Economic life of project in years. Price of New Equipment Change in NWC Fixed Costs Variable Costs (% of Revenue) Salvage value of New Equipment Marginal Tax Rate First Year Unit Sales Sales Growth Rate Unit Sale Price First Year Revenue $ 145,042.00 30.0% 5900 21.00% Market Value of Equity $ 70,500,000.00 # of Shares Outstanding 940000 Market Value of Debt $ 113,400,000.00 # of Bonds Outstanding 120000 Total Market Value $ 183,900,000.00 Market Price of Bonds $ 945.00 Weight of Equity 38.34% Market Price of Stock $ 75.00 Weight of Debt 61.66% E(R) 9.50% |R, 2.0% Bond Info Provided for your convenience B 1.38 Years to Maturity 12 Cost of Equity (re) 12.35% PMT $45.00 Cost of Debt (l'd 8.46% FV $1,000 After-Tax Cost of Debt 5.92% Before tax YTM 4.23% WACC 8.93% Before tax YTM * 2 8.46% $ 105.00 629,500.00 $