Pear Computer Horizons Case Study

Investment Proposals

Amanda Morrison, CEO of PCH, wants you to evaluate two investment proposals that the company is considering:

1. The acquisition of a Canadian camera company; and
2. The launch of a new product for government and business enterprises.

Ms. Morrison reminds you that only relevant costs and revenues should be considered. "Relevant costs have to be occurring in the future," explained Ms. Morrison. "And have to differ from the status quo. For example, if we choose to buy the Canadian camera company, it is only the incremental revenue and costs related to the purchase that should be considered. We also need to take into account the opportunity costs associated with the alternatives. For example, for the new product launch, we need to factor in the lost sales from some of our current products in catering to those customers."

More details on each investment proposal are included below. Ms. Morrison wants you to recommend if PCH should invest in one, both, or none of the investment proposals.

Required Return

Ms. Morrison wants you to use the weighted average bond yield for your required return. The total market value of debt PCH is expected to have going into this investment is $200M, which includes the current amount of bonds on the financial statements of $150M at a 6% interest rate and a planned new debt issuance of $50M at a higher 8% rate. All long-term debt is in the form of bonds. Ignore income tax effects when calculating the required return (i.e., do not take the after-tax cost of debt). Use current interest rates as a proxy for bond yield.

How to Proceed

1. Calculate the bond yield to utilize as your required return.

   Bond Yield	Marks	Student
   	Bond Yield	2
   	Attempt to use weighted average of debt	2