Overview:

You are an investment analyst. Your boss wants you to evaluate the cost of capital for two potential acquisitions. One is a sock manufacturer and one is a shoe manufacturer, both are private companies. She would like for you to use company comparable data from a listing of public companies (provided below) when you evaluate each opportunity. Your company is a very discipline investor and is highly sensitive to a targets cost of capital and will be focused heavily on that analysis and your recommendation.

Sock and Shoe Industry Data:

Company	Industry	Annual Free Cash Flow	Current Stock Price per Share	Levered Equity Beta	Debt Beta	Debt to Equity %
Bolton	Socks	$5.3 mil.	$12.50 / shr.	1.7	.74	18%
Carey	Socks	$2.4 mil.	$22.70 / shr.	1.3	.68	24%
Argyles	Socks	$1.3 mil.	$42.25 / shr.	2.0	.65	43%
Hobson	Socks	$1.2 mil.	$21.53 / shr.	1.4	.68	36%
Cahill	Socks	$7.1 mil.	$34.20 / shr.	2.1	.73	19%
Giant	Shoes	$24.7 mil.	$12.90 / shr.	1.4	.61	14%
Soles	Shoes	$26.3 mil.	$52.54 / shr.	1.9	.68	17%
Beninis	Shoes	$15.3 mil.	$42.77 / shr.	2.1	.54	39%
Giuseppes	Shoes	$47.2 mil.	$92.50 / shr.	1.7	.79	17%
Laces	Shoes	$17.3 mil.	$22.50 / shr.	1.8	.83	28%

Target Company Data:

Target #	Industry	Annual Free Cash Flow	Current Stock Price per Share	Location	Employees	Age of Company
1 Silks	Socks	$4.3 mil.	Private	Chicago	175	22 yrs.
2 - Kicks	Shoes	$18.7 mil.	Private	Boston	367	7 yrs.

Key Assumptions:

The sock opportunity and shoe opportunity should be solved separately and then compared

All companies are in the same country so you have no concerns with country specific issues, exchange rates, country premiums, etc.

The company has spent $2.2 million evaluating this opportunity in diligence cost

All comparable companies have a 35% corporate tax rate

Any shoe deal will be financed with 25% debt

Any sock deal will be financed with 15% debt

Your companys pre-tax cost of debt is 6% on all deals

Assume a risk-free rate of 4.5% on shoes and 5.5% on socks

Assume a market risk premium of 8% on shoes and 9% on socks

Assume you like Italian loafers and silk socks

Key Task

Please analyze the situation as described above using a single excel workbook (with multiple pages if you desire) drop in notes where it makes sense in the excel file so that it is understandable. Additionally, use a Word document to comment on the items below.

Analyze the equity betas (unlevered) for each comparable company and determine an industry measure (one for socks one for shoes).

What comparable company in each industry has the most attractive capital structure (in your opinion) and why?

What comparable company in each industry has the least attractive capital structure (in your opinion) and why?

Estimate the levered cost of equity for both target companies being considered.

Calculate and describe the WACC for each target.

Compare and comment on the WACCs for each target?

Evaluate the two targets against each other, what is the better investment? Why? Would you recommend either, both, etc.?

What other information would you want to have in evaluating the Shoe and Sock opportunities?