Please help me answer these questions. The answer sheet is attached for solutions.

PROBLEM 3-4: TitMar Motor Company Given Assumptions and Predictions Price per unit Market share (%) Market size (Year 1) Growth rate in market size beginning in Year 2 Unit variable cost Fixed cost Tax rate Cost of capital Investment in NWC Initial investment in PP&E Depreciation (5 year life wo salvage) Solution Legend Estimates $4,895 15.00% $200,000 5.00% $4,250 $9,000,000 50.00% 18.00% = = = = = = Part a. Substitute 5% for market share (%) . Part b. Substitute $4,500 for the price per unit. of the predicted change in firm 5.00% revenues. $7,000,000 $1,400,000 Solution Year Investment Revenue Variable Cost Fixed cost Depreciation EBT(Net Operating Income) Tax Net Operating Profit after Tax (NOPAT) Plus: Depreciation expense Less: Capex Less: Change in NWC Free Cash Flow Net Present Value Internal Rate of Return 0 $(7,000,000) 1 2 5 161,902,125 (140,568,750) (9,000,000) (1,400,000) $10,933,375 (5,466,688) $5,466,688 1,400,000 (404,755) $6,461,932 169,997,231 (147,597,188) (9,000,000) (1,400,000) $12,000,044 (6,000,022) $6,000,022 1,400,000 (424,993) $6,975,029 178,497,093 (154,977,047) (9,000,000) (1,400,000) $13,120,046 (6,560,023) $6,560,023 1,400,000 8,924,855 $16,884,878 31,500 33,075 34,729 36,465 $9,526,209 39.82% a. If the market share is only 5% then the project's NPV = b. If market share = 15% and the price of the PTV falls to $4,500 the NPV = Analysis: 4 154,192,500 (133,875,000) (9,000,000) (1,400,000) $9,917,500 (4,958,750) $4,958,750 1,400,000 (385,481) $5,973,269 30,000 (7,000,000) (7,342,500) $(14,342,500) Units Sold Breakeven Sensitivity Analysis Price per unit Market share (%) Market size (Year 1) Growth rate in market size beginning in Year 2 Unit variable cost Fixed cost Tax rate Cost of capital Investment in NWC 3 146,850,000 (127,500,000) (9,000,000) (1,400,000) $8,950,000 (4,475,000) $4,475,000 1,400,000 (367,125) $5,507,875 Critical % Change Critical Value Value given in problem Formula/Calculation/Analysis required Qualitative analysis or Short answer required Goal Seek or Solver cell Crystal Ball Input Crystal Ball Output PROBLEM 4-5 Given Maturity Terms Face value Coupon rate Offering price 5 years Interest only $1,000 12.00% $800 Solution Solution Legend a. Promised YTM = = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output b. (Note: the discussion of this analysis is found in the Appendix to the chapter) Bond Rating Caa/CCC 10 Year Treasury Yield = 5.02% Coupon 12.00% Principal $1,000.00 Price $800.00 Maturity 5 years Recovery Rate 50.00% Default Probability 5.00% Default Cash Flows Year 0 1 2 3 4 5 1 2 3 4 5 Promised Cash Flow Promised YTM Expected yield to maturity if default occurs in this year Probability of default in each year Weighted YTM = E(YTM) x Pb of default Average YTM based on Expected Cash Flows YTM Spread Cost of Debt Spread Expected YTM = Cost of debt PROBLEM 5-2 Given Debt Ratio (current) Equity Ratio (current) Cost of Debt Market Risk Premium Equity Beta Debt Beta Risk Free Rate Corporate Tax Rate Solution Legend 30.0% 70.0% 6.0% 5.25% 1.20 0.29 4.5% 0.35 Solution a. Cost of Equity b. WACC c. Unlevered beta (current debt levels) Revised Equity Beta Cost of Equity Debt Ratio Equity Ratio Revised WACC 40.0% = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Note: This analysis presumes that the cost of debt financing is "sticky" in the sense that it varies in a discrete fashion with the firm's bond rating. In other words, even though the firm has increased its use of financial leverage from 35 to 40% the cost of debt (and the debt beta) do not change.bOn the other hand, the cost of equity does change since the higher leverage implies a higher equity beta. Please use the attached spreadsheet for the answers. Thank you! 34 Project Risk Analysis - Breakeven Sensitivity The TitMar Motor Company is considering the production of a new personal transportation vehicle that would be called the PTV. The PTV would compete directly with the innovative new Segway. The PTV will utilize a three wheel platform capable of carrying one rider for up to 6 hours per battery charge, thanks to a new battery system developed by TitMar. TitMar's PTV will sell for substantially less than the Segway but will offer equivalent features. The pro forma financials for the proposed PTV project, including forecasts and assumptions that underline them are set out in Exhibit P34.1. Note that revenue is calculated as follows: price per unit * market share (%) * market size, and units sold = revenues / price per unit. The project offers an expected NPV of $9,526,209 and an IRR of 39.82%. Given TitMar's stated hurdle rate of 18%, the project looks like a winner. Even though the project looks like very good based on management's estimates, it is risky and can turn from a positiveNPV investment to a negative one with relatively modest changes in the key value drivers. Develop a spreadsheet model of the project valuation and answer the following questions: a) If the firm's market share turns out to be only 5%, what happens to the project's NPV and IRR? b) If the market share remains at 15% and the price of the PTV falls to $4, 500, what is the resulting NPV? 45 Calculating the Expected YTM International Tile Importers, Inc., is a rapidly growing firm that imports and markets floor tiles from around the world that are used in the construction of custom homes and commercial buildings. The firm has grown so fast that its management is considering the issuance of a fiveyear interestonly note. The notes would have a principal amount of $1,000 and pay 12% interest each year, with the principal amount due at the end of Year 5. The firm's investment banker has agreed to help the firm place the notes and has estimated that they can be sold for $800 each under today's market conditions. a) What is the promised yield to maturity based on the terms suggested by the investment banker? b) The firm's management looked at the yield to maturity estimated above with dismay, for it was much higher than the 12% coupon rate, which is much higher than current yields on investmentgrade debt. The investment banker explained that for a small firm such as International Tile, the bond rating would probably be in the middle of the speculative grades, which requires a much higher yield to attract investors. It even suggested that the firm recalculate the expected yield to maturity on the debt under the following assumptions: The risk of default in Years 1 through 5 is 5% per year, and the recovery rate in the event of default is only 50%. What is the expected yield to maturity under these conditions? 52 Calculating a firm's WACC and Project WACC Amgel Manufacturing Company's current capital structure is comprised of 30% debt and 70% equity (based on market values). Amgel's equity beta (based on its current level of debt financing) is 1.20, and its debt beta is 0.29. Also, the riskfree rate of interest is currently 4.5% on longterm government bonds. Amgel's investment banker advised the firm that, according to its estimates, the market risk premium is 5.25%. a. What is your estimate of the cost of equity capital of Amgel (based on the CAPM)? b. If Amgel's marginal tax rate is 35%, what is the firm's overall weighted average cost of capital (WACC)? c. Amgel is considering a major expansion of its current business operations. The firm's investment banker estimates that Amgel will be able to borrow up to 40% of the needed funds and maintain its current credit rating and borrowing cost. Estimate the WACC for this project