NCNB is now selling for $20 per share and it has 14 million outstanding common shares. The company has an equity of 0.94. A dividend of 50 cents was just paid to all of the common shareholders and analysts estimate that it will grow steadily at 5% per year. As for the preferred shares, there are 1.5 million shares outstanding, each of which is selling at $25 with a $2.5 dividend. The firm has an AA rating bond currently quoted at 110. Coupon rate is 9% with semiannual coupons. There are 75 thousand outstanding bonds and time to maturity is 15 years. Besides that, you observe the of three companies that focus on producing talk shows, such as the Conan Show, the Ellen show, and the Chris Rock show. These are 1.35, 1.07, and 1.24. The expected marker return is 6.4%, the current risk-free risk rate is 1.9%, and the corporate tax rate is 40%.

The project is expected to last 4 years. The company is planning to spend $2 million on fixed assets such as the filming equipments. Xiao Ming has already spent $100,000 on consultancy to check the feasibility of the project. There is an idle studio that the company bought a few years ago. The operation manager suggested that the studio is perfect to film the BB King, and it is worthy of $400,000 if it is sold on market today. The projected sales for the 4 years are $1 million, $1.7 million, $1.6 million, and $2 million. The variable cost is 50% of the projected sales, and the fixed cost is $500,000 for every year. The company also estimates its increases in gross profit from other existing projects to be $5 million, $3 million, $4 million, and $6 million for year 1, 2, 3, and 4, respectively. Your team thinks 20%, 50%, 30%, 10% of these increases in gross profit, respectively, are due to the introduction of YCYU. The initial net working capital is going to be $150,000, NWC increases by 200,000 for year 1, decreases by 75,000 for year 2, increases by 120,000 for year 3, and increases by 50,000 for year 4. The company is expecting to recover 80% of its initial NWC at the end of the project. Suppose both the studio and the filming equipments belong to class 8, and subject to an annual CCA rate of 20%. , and the total capital spending is estimated to have a salvage value of $1.1 million at the end of the project.

Question 1: What is the NPV of this project today? Calculate the WACC and an appropriate interest rate using pure play method, and take the simple average of the two as the appropriate discount rate for the project. Use the CAPM model for common shares and the dividend growth Model for the preferred shares when calculating the cost of equity. Use the EAR, not the YTM, when calculating the cost of debt. Present your answers with the Tax Shield Approach on an Excel spread sheet.

Questions 2: the NPV can be sensitive to the estimations of discount rate and the cash flows. You decided to recalculate the NPV with a worse case where the projected sales are 75% of what your staff estimated, and with a worst case where the projected sales are 50% of what your staff estimated before. In addition, plot a graph for NPV (Y-Axis) and the discount rate (X-Axis) using Excel to show the sensitivity of NPV to the change in discount rate. You only need to do this for the original case (Do not change the cash flows but change the discount rate in this case)