please answer and calculate all the questions bellow. with Excell formulas

Center 00 - x fx B D E F G H Details of McCormick Plant Proposal As you know from Project 4, McCormick & Company is considering building a new factory in Largo, Maryland. McCormick & Company decided to offer $4,424,000 to obtain the land for this project. The new factory will require an Initial investment of $350 million to build the new plant and purchase equipment. You have been asked to continue your work from project 4 with a full analysis of the proposed factory, including the start-up costs, the projected net cash flows from operations, the tax impact of depreciation, and the cash flow impacts of changes in working capital. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included below. The company will need to finance some of the cash to fund $17 million in accounts receivable and $14 million in Inventory starting at year zero. The company expects vendors to give free credit on purchases of $15 million (accounts payable). The CFO wants you to consider the net cash outflows for working capital as well as the cash outflows for the plant, equipment, and land in year zero. Note: The $17 million for accounts receivable and the $14 million for Inventory are cash outflows. The $15 million for accounts payable is a cash Inflow. The CFO has indicated that this net working capital will be recovered as a cash Inflow in year 21. She also estimates that the company will be able to sell the factory, equipment, and land in year 21 for $40 million The company estimates that the cash flows from operations will be as shown in Table 2. Note: Only the cash flows related to operations (years 1-20) will generate accounting profits and thus taxable income (or losses). Use the WACC that you recommended in question 5 of the Cost of Capital tab for the discount rate. Questions: 1. What will be the depreciation for tax purposes each year? Complete Table 1 below to answer this question. Note: the total deprecation for tax purposes will be $350 million. 2. Create an after-tax cash flow timeline for the proposed factory in Table 2 below. Note: The CFO estimates that operations for the company will be profitable on an on-going basis. As a result, any accounting loss on this specific project will provide a tax benefit for the company overall in the year of the loss. 3. Calculate the NPV and IRR using the data from Table 2. Should the project be accepted? The following questions will be used to assist in evaluating the proposed project's risk. 4. The CFO is particularly concerned about the potential impact of future tax increases and that the expenses may have been systematically understated. In order to undertake an objective evaluation of the project's risk, she asks you to prepare a second analysis with a less favorable set of assumptions. She asks, "What would happen to the NPV and IRR calculations if the cash outflow for expenses comes in 2% higher than estimated for the entire life of the project and if the tax rate increases to 50% (combined Federal and Maryland state rates) starting in year 4?" Create an after-tax cash flow timeline for the proposed factory with these new assumptions in Table 3 below. 5. Calculate the NPV and IRR using the data from Table 3. 6. Considering all of your work In questions 1 through 5, should the project be accepted? Discuss the risk and the potential reward of this project for McCormick. astructions Cost of Capital Capital Budgeting A B D E F G H 6 Answer Questions Below: -7 8 9 0 1 2 3 4 5 6 Year Table 1 MACRS Depreciation $350 7 Year class Depreciation (in milions) 1 14.29%$ 50.02 2 24.49% $ 85.72 3 17.49% $ 61.22 4 12.49% $ 43.72 5 8.93%$ 31.26 6. 8.92% $ 31.22 7 8.93%$ 31.26 8 4.46% $ 15.61 -7 8 9 0 61 2 3 2 B Table 2 D E F Year -4 -5 -6 37 8 99 0 2 3 4 75 16 27 Cash from Cash outflow, Depreciati Taxable Tax in After tax Revenue in expenses in on in Income in s SMillions Cash Flow SMillions $Millions SMillions Millions 27.5% rate in Millions OS $354.42 $ (354.42) $ (97.47) S (256.95) 1 $ 1,800.00 1,728.00 $ 50.02 $ 21.99 $ 6.05 65.95 2 $ 1,900.00 $ 1,824.00 S 85.72 $ (9.72) $ (2.67) 78.67 3 $ 2,000.00 $ 1,920.00 $ 61.22$ 18.79$ 5.17$ 74.83 4 $ 2,100.00 $ 2,016.00 43.72 40.29 $ 11.08$ 72.92 5$ 2,200.00 $ 2,112.00 $ 31.26 $ 56.75 $ 15.60 $ 72.40 6 $ 2,300.00 $ 2,208.00 $ 31.22$ 60.78$ 16.71 75.29 7 $ 2,400.00 S 2,304.00$ 31.26 $ 64.75S 17.80 $ 78.20 8 $ 2,500.00 2,400.00 $ 15.61 $ 84.39 $ 23.21 $ 76.79 9 $ 2,600.00 S 2,496.00 $ 104.00 $ 28.60 $ 75.40 10$ 2,700.00 $ 2,592.00 $ 108.00$ 29.70 S 78.30 11 $ 2,600.00 $ 2,496.00 $ 104.00 $ 28.60 $ 75.40 12 $ 2,500.00 $ 2,400.00 $ 100.00 $ 27.50 $ 72.50 13 S 2,400.00 $ 2,304.00 $ 96.00 $ 26.40$ 69.60 14 $ 2,200.00 2,112.00 88.00 $ 24.20 $ 63.80 2,000.00 $ 1,920.00 $ 80.00 $ 22.00 S 58.00 16 S 1,800.00 $ 1,728.00 $ 72.00 19.80S 52.20 17 S 1,500.00 1,440.00 $ 60.00 $ 16.50 $ 43.50 18 $ 1,200.00 1,152.00 $ 48.00 $ 13.20 $ 34.80 19 S 800.00 $ 768.00 $ 32.00 $ 8.80 23.20 20$ 400.00 $ 384.00 $ 16.00 $ 4.405 11.60 21 $ 40.00 $ 40.00 1.00 $ 29.00 .... $ 15$ 29 B0 31 B2 83 34 35 36 37 Instructions Cost of Capital Capital Budgeting Ready B D E G H - K L M 3 NPV IRR $624.99 28% The project should be accepted since the NPV is greater than zero hence a potential profit of $624.99 will be made Also, the IRR (28%) is greater than the risk free rate (3%) and the cost of debt (4%) 4 Table 3 B D E F Year Tax in SMillions 27.5% rate In years 1, Cash from Cash outflow, Depreciati Taxable 2, 3 and After tax Revenue in expenses in on in Income in $ 50% there Cash Flow $Millions SMillions SMillions Millions after In SMillions OS $ 361.51 $ $ (361.51) S (99.41) S (262.09) 1$ 1,800.00 1,762.56 $ 50.02 $ (12.57) $ (3.46) S 40.90 2 $ 1,900.00 1,860.48 $ 85.72 $ (46.20) $ (12.70) S 52.22 3 $ 2,000.00 1,958.40 $ 61.22 $ (19.62) $ (5.39) 46.99 4 $ 2,100.00 S 2,056.32 $ 43.72 $ (0.04) $ (0.02) $ 43.70 5 $ 2,200.00 2,154.24 $ 31.26 S 14.50 S 7.25$ 38.51 6 $ 2,300.00 2,252.16 $ 31.22 $ 16.625 8.31 S 39.53 75 2,400.00 2,350.08 $ 31.26 S 18.67$ 9.33 $ 40.59 8 $ 2,500.00 $ 2,448.00 $ 15.61$ 36.39S 18.20 S 33.81 9 $ 2,600.00 $ 2,545.92 S $ 54.08 27.04s 27.04 10 $ 2,700.00 $ 2,643.84S S 56.16 $ 28.08$ 28.08 11 $ 2,600.00 $ 2,545.92 S $ 54.08 $ 27.04S 27.04 12$ 2,500.00 2,448.00 S $ 52.00 $ 26.00 $ 26.00 13 $ 2,400.00 S 2,350.08S $ 49.92 $ 24.965 24.96 14 $ 2,200.00 $ 2,154.24S $ 45.76 $ 22.885 22.88 15S 2,000.00 1,958.40 $ $ 41.50 $ 20.80S 20.80 16 $ 1,800.00 1,762.56 $ $ 37.44 $ 18.72 $ 18.72 175 1,500.00 $ 1,468.80$ $ 31.20 S 15.60 $ 15.60 18$ 1,200.00 1,175.04 $ 24.96 $ 12.48$ 12.48 19 $ 800.00 S 783.36 $ $ 16.64 $ 8.32 $ 8.32 20 $ 400.00 $ 391.68 $ $ 8.32 $ 4.16 S 4.16 21 $ 40.00 $ $ $ 40.00 $ 20.00 $ 20.00 3 IT in 6 s 7 SNPV IRR $166.72 13% 0 Wrap Text B I General IC A Merge & Center $ % ) fx D E F G H K Consideering the working in part 3 and part 5, the project is can be said to be profitable This is because the NPV is greater than zero and the IRR lis greater than both the Cost of ebt and the risk free rate However, the project is highly risky. The changes in expenses and tax rates led to a decrease in NPV from $624.99 to $166.72 and a decrease in IRR from 28% to 13%. M88 2x Vfx B D E F G H 1 Year 50.02 49 50 51 52 53 54 55 56 57 58 59 60 61 Table 1 MACRS Depreciation $350 7 Year class Depreciation (in millions) 1 14.29% S 2 24.49 $ 85.72 3 17.49% 4 12.49% S 43.72 5 8.93% 6 8.92% 7 8.93% 8 4.46% 2 62 63 Year uuuuuu 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 Table 2 B D E F After tax Cash from Cash outflow, Depreciati Taxable Tax In Cash Flow Revenue in expenses in on in Income in SMillions In $Millions $Millions SMillions $ Millions 27.5% rate SMillions OS 1 $ 1,800.00 $ 1,728.00 $ 50.02 $ 21.99 $ 6.05 $ 65.95 2 $ 1,900.00 $ 1,824.00 $ 85.72 $ (9.72) $ (2.67) $ 78.67 3 $ 2,000.00 $ 1,920.00 4 $ 2,100.00 $ 2,016.00 5$ 2,200.00 $ 2,112.00 6 $ 2,300.00 $ 2,208.00 7$ 2,400.00 $ 2,304.00 8 $ 2,500.00 $ 2,400.00 9 $ 2,600.00 $ 2,496.00 10 S 2,700.00 $ 2,592.00 11 $ 2,600.00 S 2,496.00 $ 104.00 $ 28.60 $ 75.40 12 S 2,500.00 $ 2,400.00 13 $ 2,400.00 $ 2,304.00 14 $ 2,200.00 $ 2,112.00 15 S 2,000.00 $ 1,920.00 165 1,800.00 1,728.00 17 s 1,500.00 1,440.00 18$ 1,200.00 $ 1,152.00 19 $ 800.00 $ 768.00 20$ 400.00 $ 384.00 21 3 NPV IRR Instructions Cost of Capital Capital Budgeting MBB A B D E F 1 4 2 3 Table 3 B D E F Year Tax in SMillions 27.5% rate in years 1, After tax Cash from Cash outflow, Depreciati Taxable 2,3 and Cash Flow Revenue in expenses in on in Income in 50% there in SMillions SMillions $Millions $ Millions after SMillions O $ 1 $ 1,800.00 $ 1,762.56 $ 50.02 $ (12.57) $ (3.46) $ 40.90 2 $ 1,900.00 $ 1,860.48 $ 85.72 $ (46.20) $ (12.70) S 52.22 3 $ 2,000.00 4 $ 2,100.00 $ 2,056.32 $ 43.72 $ (0.04) $ (0.02) $ 43.70 S $ 2,200.00 6 $ 2,300.00 7 $ 2,400.00 8$ 2,500.00 9 $ 2,600.00 10 $ 2,700.00 11 $ 2,600.00 $ 2,545.92 $ $ 54.08$ 27.04 $ 27.04 12$ 2,500.00 13 $ 2,400.00 14 $ 2,200.00 15$ 2,000.00 16 $ 1,800.00 17 $ 1,500.00 18$ 1,200.00 19 $ 800.00 20 $ 400.00 21 5 NPV IRR 5 Instructions Cost of Capital Capital Budgeting forg D K M As part of your work, you will be asked for a recommendation for the cost of equity. There are three widely accepted methods used to calculate the cost of equity. They are the Capital Asset Pricing Model (APM), the Discounted Cash Flow approach (DCF) and the debt rate plus a risk premium of 3% to 5% recommended by one board member. This last is often used by very wealthy investors as a check on the other two methods. Your recommendation for the cost of equity will be necessary so you can undertake the calculation estimating the WACC Questions: 1. You have been asked to calculate the cost of equity using the Capital Asset Pricing Model (CAPM). The CFO estimates the Beta as 0.90. Management wants to use the 30 year bond rate as the risk free rate, arguing that investors should make long term investments that rate is 3x today. The expected return on the stock market as a whole has been estimated to be 7%, 10% and 12% by various studies. The CFO asks that you use an expected return of 9% for the average stock. The market risk Premium (RP) wil be 6.9% minus 3% -6%. Calculate the cost of equity (Re) using the CAPM. The formula is Rs =rRF + RPM)x. Rs is the required return on equity or the cost of Equity, tu is the risk free rate, is the required stock market retum in excess of the risk free rate, and .(Betais the stocks relative risk B is also described as the estimate of the amount of risk that an individual stock contributes to a well balance portfolio 2. The Discounted Cash Flow model is referred to as the Direct Dividend Model in the MBA 620 course materials. The formula reduces to Rs-(0/P.I+g where Rs is the required return on equity or the cost of Equity, D, is the expected future dividend, P, is the price of the stock today and is the expected growth in dividends. The CFO notes that the expected future dividend is $2.38 and the expected growth rate is 7%. For this calculation, please use the March 17, 2020 closing price of $138.70 per share. Calculate the cost of equity (Rs) using the DCF approach. 3. Cristina Flores is an advisor to a board member who works at a private equity firm. She has told the CFO that sophisticated investors use a quick estimate of the cost of equity. She says that the cost of equity must logically be higher than the company's debt rate. The estimate is that 3% to 5% should be added to the company's long term interest rates. McCormick & Company estimates its current borrowing cost at 4%. Make your own estimate of the relative risk of McCormick & Company. Then, calculate the cost of equity (Rs) using this own debt plus 3% to 5x" formula 4. Calculate the weighted Average Cost of Capital (WACC) for McCormick and Company using the formula WACC (W XR, * (1-1+ (W x Rs) Rs the cost of equity Rd the cost of debt To the tax rate WValue of debt / (Value of debt plus value of equity) W-Value of equity / Value of debt plus value of equity **Note that the weight of debt plus the weight of equity must total to 100%, as there are only two components in the capital structure." In order to estimate the weights of debt and equity in the total capital structure, the CFO suggests using the book value of debt and the market value of equity. To determine the book value of debt, use data from the year end November 2019 McCormick 10K. Look on the Balance sheet and add the following-Short term borrowings, Current portion of long term debt, and long term debt. To determine the market value of equity, use the following data: on March 17, 2020 the market value of equity for Market Cap" for McCormick (MUC) - as found on Yahoo finance was $18.42 bilion. Used for the cost of debt. Use 27.5% as the tax rate an estimate of the combination of federal and state income tax rates. Make your own best estimate of the cost of equity based on your work in questions 1, 2 and 3 Note that D K M Information from McCormick Your task is to make an estimate of McCormick & Company's Weighted Average cost of Capital (WACC) to use as the discount rate for evaluating capital projects, such as the one in the next tab. The CFO plans to borrow a portion of the required 5350 milion initial investment for this project using 20 year bonds. For most of the past 10 years, the company has used as the discount rate. This was based on a study of the company's WACC in early 2010. Interest rates have risen since the last study when the McCormick & Co rate average interest rate was. We will use 4 today. Also, there has been a change in the weights between debt and equity in the overall capital structure since 2010 The most significant change was the acquisition of RB Foods. It is the main reason for this study. Here is what our MOBA reported about that acquisition On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division/" Foods") from ecker Blenckiser Group plc. The purchase price was approximately $4.2 billion, net of acquired cash. The acquisition was funded through our issuance of approximately 6.35 million shares of common stock non voting see note 13 of the financial statements and through new borrowings comprised of senior unsecured notes and pre-payable term loons (see note of the financial statements. The acquired market leading brands of Ra Foods include French Frank's Red Hot and Cattlemen's, which are a natural strategie fit with our robust global branded flavor portfolio We believe that these additions move us to a leading position in the attractive U.S. condiments category and provide significant international growth opportunities for our consumer and industrial segments. The R8 Foods acquisition resulted in acquisitions contributing more than one-third of our sales growth in 2017 and expected to acquisitions contributing more than one-third of our sales growth in 2018 As part of your work, you will be asked for a recommendation for the cost of equity. There are three widely accepted methods used to calculate the cost of equity. They are the Capital Asset Pricing Model (CAPM), the Discounted Cash Flow approach (DCF) and the debt rate plus a risk premium of 3% to recommended by one board member. This last is often used by very wealthy investors as a check on the other two methods. Your recommendation for the cost of equity will be necessary so you can undertake the calculation estimating the WACC. Center 00 - x fx B D E F G H Details of McCormick Plant Proposal As you know from Project 4, McCormick & Company is considering building a new factory in Largo, Maryland. McCormick & Company decided to offer $4,424,000 to obtain the land for this project. The new factory will require an Initial investment of $350 million to build the new plant and purchase equipment. You have been asked to continue your work from project 4 with a full analysis of the proposed factory, including the start-up costs, the projected net cash flows from operations, the tax impact of depreciation, and the cash flow impacts of changes in working capital. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included below. The company will need to finance some of the cash to fund $17 million in accounts receivable and $14 million in Inventory starting at year zero. The company expects vendors to give free credit on purchases of $15 million (accounts payable). The CFO wants you to consider the net cash outflows for working capital as well as the cash outflows for the plant, equipment, and land in year zero. Note: The $17 million for accounts receivable and the $14 million for Inventory are cash outflows. The $15 million for accounts payable is a cash Inflow. The CFO has indicated that this net working capital will be recovered as a cash Inflow in year 21. She also estimates that the company will be able to sell the factory, equipment, and land in year 21 for $40 million The company estimates that the cash flows from operations will be as shown in Table 2. Note: Only the cash flows related to operations (years 1-20) will generate accounting profits and thus taxable income (or losses). Use the WACC that you recommended in question 5 of the Cost of Capital tab for the discount rate. Questions: 1. What will be the depreciation for tax purposes each year? Complete Table 1 below to answer this question. Note: the total deprecation for tax purposes will be $350 million. 2. Create an after-tax cash flow timeline for the proposed factory in Table 2 below. Note: The CFO estimates that operations for the company will be profitable on an on-going basis. As a result, any accounting loss on this specific project will provide a tax benefit for the company overall in the year of the loss. 3. Calculate the NPV and IRR using the data from Table 2. Should the project be accepted? The following questions will be used to assist in evaluating the proposed project's risk. 4. The CFO is particularly concerned about the potential impact of future tax increases and that the expenses may have been systematically understated. In order to undertake an objective evaluation of the project's risk, she asks you to prepare a second analysis with a less favorable set of assumptions. She asks, "What would happen to the NPV and IRR calculations if the cash outflow for expenses comes in 2% higher than estimated for the entire life of the project and if the tax rate increases to 50% (combined Federal and Maryland state rates) starting in year 4?" Create an after-tax cash flow timeline for the proposed factory with these new assumptions in Table 3 below. 5. Calculate the NPV and IRR using the data from Table 3. 6. Considering all of your work In questions 1 through 5, should the project be accepted? Discuss the risk and the potential reward of this project for McCormick. astructions Cost of Capital Capital Budgeting A B D E F G H 6 Answer Questions Below: -7 8 9 0 1 2 3 4 5 6 Year Table 1 MACRS Depreciation $350 7 Year class Depreciation (in milions) 1 14.29%$ 50.02 2 24.49% $ 85.72 3 17.49% $ 61.22 4 12.49% $ 43.72 5 8.93%$ 31.26 6. 8.92% $ 31.22 7 8.93%$ 31.26 8 4.46% $ 15.61 -7 8 9 0 61 2 3 2 B Table 2 D E F Year -4 -5 -6 37 8 99 0 2 3 4 75 16 27 Cash from Cash outflow, Depreciati Taxable Tax in After tax Revenue in expenses in on in Income in s SMillions Cash Flow SMillions $Millions SMillions Millions 27.5% rate in Millions OS $354.42 $ (354.42) $ (97.47) S (256.95) 1 $ 1,800.00 1,728.00 $ 50.02 $ 21.99 $ 6.05 65.95 2 $ 1,900.00 $ 1,824.00 S 85.72 $ (9.72) $ (2.67) 78.67 3 $ 2,000.00 $ 1,920.00 $ 61.22$ 18.79$ 5.17$ 74.83 4 $ 2,100.00 $ 2,016.00 43.72 40.29 $ 11.08$ 72.92 5$ 2,200.00 $ 2,112.00 $ 31.26 $ 56.75 $ 15.60 $ 72.40 6 $ 2,300.00 $ 2,208.00 $ 31.22$ 60.78$ 16.71 75.29 7 $ 2,400.00 S 2,304.00$ 31.26 $ 64.75S 17.80 $ 78.20 8 $ 2,500.00 2,400.00 $ 15.61 $ 84.39 $ 23.21 $ 76.79 9 $ 2,600.00 S 2,496.00 $ 104.00 $ 28.60 $ 75.40 10$ 2,700.00 $ 2,592.00 $ 108.00$ 29.70 S 78.30 11 $ 2,600.00 $ 2,496.00 $ 104.00 $ 28.60 $ 75.40 12 $ 2,500.00 $ 2,400.00 $ 100.00 $ 27.50 $ 72.50 13 S 2,400.00 $ 2,304.00 $ 96.00 $ 26.40$ 69.60 14 $ 2,200.00 2,112.00 88.00 $ 24.20 $ 63.80 2,000.00 $ 1,920.00 $ 80.00 $ 22.00 S 58.00 16 S 1,800.00 $ 1,728.00 $ 72.00 19.80S 52.20 17 S 1,500.00 1,440.00 $ 60.00 $ 16.50 $ 43.50 18 $ 1,200.00 1,152.00 $ 48.00 $ 13.20 $ 34.80 19 S 800.00 $ 768.00 $ 32.00 $ 8.80 23.20 20$ 400.00 $ 384.00 $ 16.00 $ 4.405 11.60 21 $ 40.00 $ 40.00 1.00 $ 29.00 .... $ 15$ 29 B0 31 B2 83 34 35 36 37 Instructions Cost of Capital Capital Budgeting Ready B D E G H - K L M 3 NPV IRR $624.99 28% The project should be accepted since the NPV is greater than zero hence a potential profit of $624.99 will be made Also, the IRR (28%) is greater than the risk free rate (3%) and the cost of debt (4%) 4 Table 3 B D E F Year Tax in SMillions 27.5% rate In years 1, Cash from Cash outflow, Depreciati Taxable 2, 3 and After tax Revenue in expenses in on in Income in $ 50% there Cash Flow $Millions SMillions SMillions Millions after In SMillions OS $ 361.51 $ $ (361.51) S (99.41) S (262.09) 1$ 1,800.00 1,762.56 $ 50.02 $ (12.57) $ (3.46) S 40.90 2 $ 1,900.00 1,860.48 $ 85.72 $ (46.20) $ (12.70) S 52.22 3 $ 2,000.00 1,958.40 $ 61.22 $ (19.62) $ (5.39) 46.99 4 $ 2,100.00 S 2,056.32 $ 43.72 $ (0.04) $ (0.02) $ 43.70 5 $ 2,200.00 2,154.24 $ 31.26 S 14.50 S 7.25$ 38.51 6 $ 2,300.00 2,252.16 $ 31.22 $ 16.625 8.31 S 39.53 75 2,400.00 2,350.08 $ 31.26 S 18.67$ 9.33 $ 40.59 8 $ 2,500.00 $ 2,448.00 $ 15.61$ 36.39S 18.20 S 33.81 9 $ 2,600.00 $ 2,545.92 S $ 54.08 27.04s 27.04 10 $ 2,700.00 $ 2,643.84S S 56.16 $ 28.08$ 28.08 11 $ 2,600.00 $ 2,545.92 S $ 54.08 $ 27.04S 27.04 12$ 2,500.00 2,448.00 S $ 52.00 $ 26.00 $ 26.00 13 $ 2,400.00 S 2,350.08S $ 49.92 $ 24.965 24.96 14 $ 2,200.00 $ 2,154.24S $ 45.76 $ 22.885 22.88 15S 2,000.00 1,958.40 $ $ 41.50 $ 20.80S 20.80 16 $ 1,800.00 1,762.56 $ $ 37.44 $ 18.72 $ 18.72 175 1,500.00 $ 1,468.80$ $ 31.20 S 15.60 $ 15.60 18$ 1,200.00 1,175.04 $ 24.96 $ 12.48$ 12.48 19 $ 800.00 S 783.36 $ $ 16.64 $ 8.32 $ 8.32 20 $ 400.00 $ 391.68 $ $ 8.32 $ 4.16 S 4.16 21 $ 40.00 $ $ $ 40.00 $ 20.00 $ 20.00 3 IT in 6 s 7 SNPV IRR $166.72 13% 0 Wrap Text B I General IC A Merge & Center $ % ) fx D E F G H K Consideering the working in part 3 and part 5, the project is can be said to be profitable This is because the NPV is greater than zero and the IRR lis greater than both the Cost of ebt and the risk free rate However, the project is highly risky. The changes in expenses and tax rates led to a decrease in NPV from $624.99 to $166.72 and a decrease in IRR from 28% to 13%. M88 2x Vfx B D E F G H 1 Year 50.02 49 50 51 52 53 54 55 56 57 58 59 60 61 Table 1 MACRS Depreciation $350 7 Year class Depreciation (in millions) 1 14.29% S 2 24.49 $ 85.72 3 17.49% 4 12.49% S 43.72 5 8.93% 6 8.92% 7 8.93% 8 4.46% 2 62 63 Year uuuuuu 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 Table 2 B D E F After tax Cash from Cash outflow, Depreciati Taxable Tax In Cash Flow Revenue in expenses in on in Income in SMillions In $Millions $Millions SMillions $ Millions 27.5% rate SMillions OS 1 $ 1,800.00 $ 1,728.00 $ 50.02 $ 21.99 $ 6.05 $ 65.95 2 $ 1,900.00 $ 1,824.00 $ 85.72 $ (9.72) $ (2.67) $ 78.67 3 $ 2,000.00 $ 1,920.00 4 $ 2,100.00 $ 2,016.00 5$ 2,200.00 $ 2,112.00 6 $ 2,300.00 $ 2,208.00 7$ 2,400.00 $ 2,304.00 8 $ 2,500.00 $ 2,400.00 9 $ 2,600.00 $ 2,496.00 10 S 2,700.00 $ 2,592.00 11 $ 2,600.00 S 2,496.00 $ 104.00 $ 28.60 $ 75.40 12 S 2,500.00 $ 2,400.00 13 $ 2,400.00 $ 2,304.00 14 $ 2,200.00 $ 2,112.00 15 S 2,000.00 $ 1,920.00 165 1,800.00 1,728.00 17 s 1,500.00 1,440.00 18$ 1,200.00 $ 1,152.00 19 $ 800.00 $ 768.00 20$ 400.00 $ 384.00 21 3 NPV IRR Instructions Cost of Capital Capital Budgeting MBB A B D E F 1 4 2 3 Table 3 B D E F Year Tax in SMillions 27.5% rate in years 1, After tax Cash from Cash outflow, Depreciati Taxable 2,3 and Cash Flow Revenue in expenses in on in Income in 50% there in SMillions SMillions $Millions $ Millions after SMillions O $ 1 $ 1,800.00 $ 1,762.56 $ 50.02 $ (12.57) $ (3.46) $ 40.90 2 $ 1,900.00 $ 1,860.48 $ 85.72 $ (46.20) $ (12.70) S 52.22 3 $ 2,000.00 4 $ 2,100.00 $ 2,056.32 $ 43.72 $ (0.04) $ (0.02) $ 43.70 S $ 2,200.00 6 $ 2,300.00 7 $ 2,400.00 8$ 2,500.00 9 $ 2,600.00 10 $ 2,700.00 11 $ 2,600.00 $ 2,545.92 $ $ 54.08$ 27.04 $ 27.04 12$ 2,500.00 13 $ 2,400.00 14 $ 2,200.00 15$ 2,000.00 16 $ 1,800.00 17 $ 1,500.00 18$ 1,200.00 19 $ 800.00 20 $ 400.00 21 5 NPV IRR 5 Instructions Cost of Capital Capital Budgeting forg D K M As part of your work, you will be asked for a recommendation for the cost of equity. There are three widely accepted methods used to calculate the cost of equity. They are the Capital Asset Pricing Model (APM), the Discounted Cash Flow approach (DCF) and the debt rate plus a risk premium of 3% to 5% recommended by one board member. This last is often used by very wealthy investors as a check on the other two methods. Your recommendation for the cost of equity will be necessary so you can undertake the calculation estimating the WACC Questions: 1. You have been asked to calculate the cost of equity using the Capital Asset Pricing Model (CAPM). The CFO estimates the Beta as 0.90. Management wants to use the 30 year bond rate as the risk free rate, arguing that investors should make long term investments that rate is 3x today. The expected return on the stock market as a whole has been estimated to be 7%, 10% and 12% by various studies. The CFO asks that you use an expected return of 9% for the average stock. The market risk Premium (RP) wil be 6.9% minus 3% -6%. Calculate the cost of equity (Re) using the CAPM. The formula is Rs =rRF + RPM)x. Rs is the required return on equity or the cost of Equity, tu is the risk free rate, is the required stock market retum in excess of the risk free rate, and .(Betais the stocks relative risk B is also described as the estimate of the amount of risk that an individual stock contributes to a well balance portfolio 2. The Discounted Cash Flow model is referred to as the Direct Dividend Model in the MBA 620 course materials. The formula reduces to Rs-(0/P.I+g where Rs is the required return on equity or the cost of Equity, D, is the expected future dividend, P, is the price of the stock today and is the expected growth in dividends. The CFO notes that the expected future dividend is $2.38 and the expected growth rate is 7%. For this calculation, please use the March 17, 2020 closing price of $138.70 per share. Calculate the cost of equity (Rs) using the DCF approach. 3. Cristina Flores is an advisor to a board member who works at a private equity firm. She has told the CFO that sophisticated investors use a quick estimate of the cost of equity. She says that the cost of equity must logically be higher than the company's debt rate. The estimate is that 3% to 5% should be added to the company's long term interest rates. McCormick & Company estimates its current borrowing cost at 4%. Make your own estimate of the relative risk of McCormick & Company. Then, calculate the cost of equity (Rs) using this own debt plus 3% to 5x" formula 4. Calculate the weighted Average Cost of Capital (WACC) for McCormick and Company using the formula WACC (W XR, * (1-1+ (W x Rs) Rs the cost of equity Rd the cost of debt To the tax rate WValue of debt / (Value of debt plus value of equity) W-Value of equity / Value of debt plus value of equity **Note that the weight of debt plus the weight of equity must total to 100%, as there are only two components in the capital structure." In order to estimate the weights of debt and equity in the total capital structure, the CFO suggests using the book value of debt and the market value of equity. To determine the book value of debt, use data from the year end November 2019 McCormick 10K. Look on the Balance sheet and add the following-Short term borrowings, Current portion of long term debt, and long term debt. To determine the market value of equity, use the following data: on March 17, 2020 the market value of equity for Market Cap" for McCormick (MUC) - as found on Yahoo finance was $18.42 bilion. Used for the cost of debt. Use 27.5% as the tax rate an estimate of the combination of federal and state income tax rates. Make your own best estimate of the cost of equity based on your work in questions 1, 2 and 3 Note that D K M Information from McCormick Your task is to make an estimate of McCormick & Company's Weighted Average cost of Capital (WACC) to use as the discount rate for evaluating capital projects, such as the one in the next tab. The CFO plans to borrow a portion of the required 5350 milion initial investment for this project using 20 year bonds. For most of the past 10 years, the company has used as the discount rate. This was based on a study of the company's WACC in early 2010. Interest rates have risen since the last study when the McCormick & Co rate average interest rate was. We will use 4 today. Also, there has been a change in the weights between debt and equity in the overall capital structure since 2010 The most significant change was the acquisition of RB Foods. It is the main reason for this study. Here is what our MOBA reported about that acquisition On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division/" Foods") from ecker Blenckiser Group plc. The purchase price was approximately $4.2 billion, net of acquired cash. The acquisition was funded through our issuance of approximately 6.35 million shares of common stock non voting see note 13 of the financial statements and through new borrowings comprised of senior unsecured notes and pre-payable term loons (see note of the financial statements. The acquired market leading brands of Ra Foods include French Frank's Red Hot and Cattlemen's, which are a natural strategie fit with our robust global branded flavor portfolio We believe that these additions move us to a leading position in the attractive U.S. condiments category and provide significant international growth opportunities for our consumer and industrial segments. The R8 Foods acquisition resulted in acquisitions contributing more than one-third of our sales growth in 2017 and expected to acquisitions contributing more than one-third of our sales growth in 2018 As part of your work, you will be asked for a recommendation for the cost of equity. There are three widely accepted methods used to calculate the cost of equity. They are the Capital Asset Pricing Model (CAPM), the Discounted Cash Flow approach (DCF) and the debt rate plus a risk premium of 3% to recommended by one board member. This last is often used by very wealthy investors as a check on the other two methods. Your recommendation for the cost of equity will be necessary so you can undertake the calculation estimating the WACC