please answer questions

1) (60 points total) The Case of Susan Jones Susan Jones has a job as a pharmacist earning $35,000 per year, and she is deciding whether to take another job as the manager of another pharmacy for $40.000 per year or to purchase a pharmacy that generates revenue of $330,000 per year. To purchase the pharmacy, Susan would have to use her $20.000 savings and borrow another $80.000 at an interest rate of 10% percent per year. The pharmacy that Susan is contemplating purchasing has additional expenses of $150,000 for supplies, $50,000 for hired help. $5,000 for rent and $10,000 for utilities. Assume that there are no depreciation and amortization expenses. Assume that income and business taxes are 40% and the repayment of the principal of the loan does not start before three years. Also assume that there is no inflation, no growth in revenues or expenses during the three years and that Susan can earn 2% on a 3-year treasury bill. Also suppose that Susan expects to sell the pharmacy at the end of three years for $25,000 more than the price she paid for it and that she requires a 15 percent return on her investment. a) (20 points) Build a pro forma (forecasted) ACCOUNTING income statement for 2014, 2015. and 2016 from an accounting approach down to EBIT. 2014 2015 2016 Revenue EBIT b) (20 points) Build a pro forma (forecasted) EVA statement from an ECONOMIC approach for the same period and determine the expected EVA for each year. (You can begin at EBIT from the accounting statement in part la above) 2014 2015 2016 EBIT NOPAT Cost of Capital Cost of Debt Cost of Equity Total Cost of Capital EVA Capital Gains Cash Flow c) (10 points)Determine the net present value of the stream of profits, i.e., discounted profits in year 1, year 2, year 3 plus the capital gains from selling the pharmacy. d) (10 points) i) What factors do you think are critical to Susan's plan if they fail to occur? e) Suppose that Susan expects that another pharmacy will open nearby at the end of three years and that this will drive the economic profit of her pharmacy to zero. How would this effect the negotiation with potential clients? f) Should she still purchase the pharmacy? 72 NPV = EVA (1 + WACC) TV (1 + WACC)" EVA = NOPAT - Cost of Capital NOPAT = EBIT * (1 - tax rate) Page 3 2) (10 points) Decision Making with Elasticities: _You are the manager of a small pharmaceutical company that received a patent on a new drug three years ago. Despite strong sales ($250 million last year) and a low marginal cost of producing the product (S0.25 per pill). your company has yet to show a profit from selling the drug. This is, in part, due to the fact that the company spent $1.2 billion developing the drug and obtaining FDA approval. An economist has estimated that, at the current price of $1.50 per pill. You also note that a decrease in price of 10% always leads to an increase of 6% in quantity demanded of a new drug when it is introduced. Based on this information, what can you do to boost profits? Explain. Decision Making Rule: 3) (10 points) A researcher estimated that the price elasticity of demand for automobiles in the U.S.is 2.0, while the income elasticity of demand is 0.5. Next year, U.S. automakers intend to increase the average price of automobiles by 5 percent, and they expect consumers' disposable income to fall by 4 percent. If sales of domestically produced automobiles are 10 million this year, how many automobiles %AQ AQ do you expect U.S. automakers to sell next year? Use E * - and %Ax Q Qnew = Qora *(1 + %AQ). AX