One of the major revenue-producing items of Fun Toys's manufacture division is a Baby Doll. Fun Toys currently has one baby doll, and sales have been excellent. Fun Toys's main competitor on the baby doll market is Mattel Inc (MAT). Fun Toys's baby doll is a unique item in that it comes in a variety of hair styles and is preprogrammed to play Lady Gaga music. However, Fun Toys wants to incorporate new technology into their products. Fun Toys spent $650,000 to develop a prototype for a new baby doll that has all the features of the existing baby doll but adds new features such as an AI system, much like Apples Siri or Amazons Echo, but for children. The company has spent a further $250,400 for a marketing study to determine the expected sales figures for the new baby doll.

Fun Toys can manufacture the new baby dolls for $21 each in variable costs. Fixed costs for the operation are estimated to run $2.3 million per year. The estimated sales volume is 165,000, 198,000, 122,500, 75,500, and 48,500 per year for the next five years, respectively. The unit price of the new baby doll will be $98. The necessary equipment can be purchased for $26 million and will be depreciated on a seven-year MACRS schedule (https://www.uky.edu/~dshuls00/phtax/Appendix_C_2018_Ed.pdf). It is believed the value of the equipment in five years will be $8.7 million.

As previously stated, Fun Toys currently manufactures a baby doll. Production of the existing model is expected to be terminated in two years. If Fun Toys does not introduce the new baby doll, sales will be 85,000 units and 63,000 units for the next two years, respectively. The price of the existing baby doll is $68 per unit, with variable costs of $19 each and fixed costs of $1.6 million per year. If Fun Toys does introduce the new baby doll, sales of the existing baby doll will fall by 3,000 units per year, and the price of the existing units will have to be lowered to $48 each. Net working capital for the baby dolls will be 22 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year's sales. Toyland Toys has a 21 percent corporate tax rate. The company has a target debt to equity ratio of .6 and is currently BB rated. The overall cost of capital of the company is 12 percent. The finance department of the company has asked your team to prepare the report to Nathan, the company's CEO, and the report should answer the following questions.

The company's CEO, Nathan, wants to understand the risk of the high-tech toy industry better. Since Fun Toys's main competitor, Mattel Inc (MAT), is a leading company in this industry, Nathan ask you to perform the following analysis on MAT.

a. Using the past N years of data to estimate your own beta and alpha of MAT based on a regression analysis. Document data sources used. Also explain how long a time period (from which year to which year) that you decide to use to perform your estimation, and explain why?

b. Provide your beta and alpha estimates, as well as the statistical significance (e.g. t ratio, p-value). Comment briefly.

c. Plot the security characteristic line for this company. Clearly show alpha and beta on the diagram. Is the company correctly priced, overpriced or underpriced?