please help with questions 4 - 6 thanks.

project 5 info ends

project 4 info begins

4. The controller is worried about tax increases and estimates that the tax rate with be raised to 50% (federal and Maryland state) in year 4. Also there is a concern that expenses are understated. He asks, "What would happen to the NPV calculation if the cash tax expenses come in 2% higher than estimated and the tax rate increases to 50% in year 4?" This will allow a subjective evaluation of the project risk. Calculate a new cash flow time line with cash expenses 10% higher than those in Table 2 and with a 50% tax rate. 5. What would be the net present value in this "worst case" cash flow? What will be the IRR? (Use the NPV and IRR function) 6. Should the project be accepted? Discuss the risk and the reward to McCormick. (this is to see if you can handle decision making under uncertainty. We don't know what will happen in future. Will taxes be raised or not? Will expenses go up or not? Companies must deal with these questions. If you just look at the worst case, not much will happen. We would have no Apple, Microsoft, Tesla, Google, Facebook, or Amazon if these innovators had just abandoned their ideas because someone came up with a worst case scenario. 7 A B C D Details of McCormick Plant Proposal As you know from Project 4, McCormick & Company is considering a project that requires an initial investment of $350 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $14 million. You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow impact of working capital on the capital budget evaluation. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included at the right. Year 16 The company will need to finance some of the cash to fund $17 million in receivables and $14 million in Inventory starting at year zero. The company expects vendors to give free credit on purchases of $15 million (accounts Payable). Add the net cash outflow for working capital to the cash outflow for the plant, equipment and land in year zero. The $17 million for receivables and the $14 million for Inventory are cash outflows. The $15 million for receivables is a cash inflow. Assume that this net working capital is recovered as a cash inflow in year 21. Instructions Cost of Capital Capital Budgeting O Type here to search e Year Table 1 MACRS Depreciation $350 7 Year class Depreciation 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 8.93% $31.26 8 4.46% $15.61 Table 2 A B C Cash from Cash outflow, Revenue in expenses in Depreciation in Taxable income Tax in $Millions $Millions $ Millions $Millions in $ Millions 27.5% rate $1,800 $1,728 $50.02 $21.99 $6.05 co Instructions Cost of Capital Capital Budgeting 7 15 Year After tax Cash Flow In $Millions $65.95 1 OSA corn do CZ O Type here to search M 2 $1,900 $1,824 $85.72 3 $2,000 $1,920 $61.22 $2,100 $2,016 $43.72 $2,200 $2,112 $31.26 $2,300 $2,208 $31.22 $2,400 $2,304 $31.26 $2,500 $2,400 $15.61 $2,600 $2,496 $2,700 $2,592 $2,600 $2,496 $2,500 $2,400 $2,400 $2,304 14 $2,200 $2,112 15 $2,000 $1,920 $1,800 $1,728 $1,500 $1,440 18 $1,200 $1,152 19 $800 $768 Instructions Cost of Capital Capital Budgeting 11 ANNNNSSAMME -$9.72 $18.79 $40.29 $56.75 $60.78 $64.75 $84.39 $104.00 $108.00 $104.00 $100.00 $96.00 $88.00 $80.00 $72.00 $60.00 $48.00 $32.00 1 con -$2.67 $5.17 $11.08 $15.60 $16.71 $17.80 $23.21 $28.60 $29.70 $28.60 $27.50 $26.40 $24.20 $22.00 $19.80 $16.50 $13.20 $8.80 $78.67 $74.83 $72.92 $72.40 $75.29 $78.20 $76.79 $75.40 $78.30 $75.40 $72.50 $69.60 $63.80 $58.00 $52.20 $43.50 $34.80 $23.20 12 17 AAA cal Type here to search 20 $23.20 $27.60 Year $800 $768 $32.00 $8.80 $400 $384 $16.00 $4.40 Table 3 A B Tax in Millions Cash from Cash outflow, 27.5% rate in Revenue in expenses in Depreciation in Taxable income years 1, 2, 3 and $Millions $Millions $Millions in $ Millions 50% there after 1 $1,800 $1,762.56 $50.02 -$12.57 -$3.46 $1,900 $1,860.48 $85.72 -$46.20 -$12.70 $2,000 $1,958.40 $61.22 $19.62 -$5.40 $2,100 $2,056.32 $43.72 -$0.04 -$0.02 5 $2,200 $2,154.24 $31.26 $14.50 $7.25 6 $2,300 $2,252.16 $31.22 $16.62 $8.31 7 $2,400 $2,350.08 $31.26 $18.67 $9.33 $2,500 $2,448.00 $15.61 $36.39 $18.20 9 $2,600 $2,545.92 $0.00 $54.08 $27.04 10 $2,700 $2,643.84 $0.00 $56.16 $28.08 Crno en Instructions Cost of Capital Capital Budgeting + 2 After tax Cash Flow In Millions $40.90 $52.22 $47.00 $43.70 $38.51 $39.53 $40.59 $33.80 $27.04 $28.08 enza 8 5 CA ennn - O Type here to search Bte A LBe W M $0.00 13 14 15 $2,600 $2,500 $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 $800 $400 N $2,545.92 $2,448.00 $2,350.08 $2,154.24 $1,958.40 $1,762.56 $1,468.80 $1,175.04 $783.36 $391.68 $54.08 $52.00 $49.92 $45.76 $41.60 $37.44 $31.20 $24.96 $16.64 $8.32 $27.04 $26.00 $24.96 $22.88 $20.80 $18.72 $15.60 $12.48 $8.32 $4.16 $27.04 $26.00 $24.96 $22.88 $20.80 $18.72 $15.60 $12.48 $8.32 $4.16 17 18 19 20 Instructions Cost of Capital Capital Budgeting + Type here to search 2 N 3. E F G H J K L M McCormick & Company is considering building a new factory in Largo, Maryland, James Francis, a landowner, is selling a 4.35 acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made a full offer of $3,000,000.00 for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00. Now, the landowner must make a decision between the two competing offers. To make this decision, James should first identify the Future Value (FV) of each offer. James's bank is offering a 12 percent interest rate when invested through the bank-managed growth stock portfolios. Let's help James make his decision by answering the following questions using the template to the right. 1. What is the Future Value (FV) of each offer? FV=13,740,272 What is the two competing offers? Unknown manufacturing company makes an for $3,000,000.00 and McCormick & Company makes an offer $4,424,000.00. 14 15 2. Based on your Future Value calculations, which offer should James accept? James should accept the offer from McCormick and Company McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow 70 percent Loan to Value (LTV) of the $4,424,000.00 offer in the form of a commercial acquisition and development loan to purchase the land. This means McCormick & Company will need to make a 30 percent down payment to secure the commercial acquisition and development loan. McCormick & Company is consiglering three different loan options: Loa Loan A Loan B Loan C 22 23 Loan A: 20-year loan with a fixed annual interest rate of 6 percent Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent Loan C: 15-year loan with a fixed annual interest rate of 5 percent Loar Loan A Loan B Ton 25 3. How much of the total 54,424,000.00 offer will be financed? 3,096,800 Instructions Financing and Investing Corporate Valuation Annuities F G K L M 4. Which loan will have the lowest monthly payment? Loan A 5. Which loan will have the lowest total payback amount? Loan B $3,913,699.35 | 6 Loc 6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why? I recommend McCormick select the loan with the lowest total payback amount should be accepted as overall, it will have the lowest Instructions Financing and Investing Corporate Valuation Annuities PMT FV PV $4,424,000 10 12% ($13,740,272.47) IN PV PMI FV 12% $ 4,424,000.00 ($13,740,272.47) 3 Principal Percent Down Amount Financed 30% $ 3,096,800.00 Loan Loan A Loan B Loan C PV 6 % $ 3,096,800.00 4.5% $ 3,096,800.00 5% $ 3,096,800.00 PMT ($269,993.14) ($391,369.94) ($298,352.80) BE Loan Loan A Loan B Loan C 6% 4.5% 5% PV $3,096,800 $3,096,800 $3,096,800 PMT $269,993.14 $391,369.94 $298,352.80 Total Paid $5,400,000.00 $3,913,699.35 $4,475,291.94 6 Loan B Instructions Financing and Investing Corporate Valuation Annuities Type here to search WN IK L Now that McCormick & Company has secured the land for the new factory through a loan, it is time to construct the new factory. Instead of using operating cash flow to fund the construction of the new factory, McCormick & Company has decided to raise capital. To raise additional capital, the company is considering issuing additional shares of stock. For McCormick & Company to determine how much it will cost the company to issue stock, the company must determine the expected return on the stock in relation to the systematic risk. We can help McCormick & Company with this by answering the following questions using the provided information below: McCormick & Company uses the 10-Year Treasury Constant Maturity Rate as the risk-free rate. As of 7/1/2019, this was 2.03 according to the US Treasury. McCormick & Company has disclosed the company's levered Beta is 0.60 (MarketWatch, 7/1/2019). McCormick & Company has disclosed the company's expected return on the market is 8.03% To answer the following questions, use the template to the right. 1. What is McCormick & Company's expected return on the issuance of stock using CAPM? risk fre Beta expect risk fre 2 R 17 In the CAPM, we examined the expected return on the market as a whole. In an effort to estimate the expected return of McCormick & Company's stock, we will use the Dividend Discount Model (DDM). We can help McCormick & Company with this by answering the following questions using the provided information below: McCormick & Company's expected dividend per share next year is $2.28 McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019) McCormick & Company's cock price per share was $155 70 on 7/1/2019 Instructions Financing and Investing Corporate Valuation Annuities O Type here to search A B C D McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019T McCormick & Company's stock price per share was $155.70 on 7/1/2019 Div 2. Using the Dividend Discount Model (DDM), what is the cost of equity? To find the cost of equity using DDM, we take the original equation and rearrange the equation: Div Rs = +g - Rs-g Instructions Financing and Investing Corporate Valuation Annuities M N = O + T 1 U P B X (RM -RE) V R W Rp X Expected return = 5.63 risk free rate= 2.03 Beta 0.6 expected market return risk free rate 2 RS 8.03 2.03 expected dividend= current stock prices constant growth rate= 2.28 155.7 0.087 cost of equity= 0.101644 or 10.16% Instructions Financing and Investing Corporate Valuation Annuities O Type here to search 4. The controller is worried about tax increases and estimates that the tax rate with be raised to 50% (federal and Maryland state) in year 4. Also there is a concern that expenses are understated. He asks, "What would happen to the NPV calculation if the cash tax expenses come in 2% higher than estimated and the tax rate increases to 50% in year 4?" This will allow a subjective evaluation of the project risk. Calculate a new cash flow time line with cash expenses 10% higher than those in Table 2 and with a 50% tax rate. 5. What would be the net present value in this "worst case" cash flow? What will be the IRR? (Use the NPV and IRR function) 6. Should the project be accepted? Discuss the risk and the reward to McCormick. (this is to see if you can handle decision making under uncertainty. We don't know what will happen in future. Will taxes be raised or not? Will expenses go up or not? Companies must deal with these questions. If you just look at the worst case, not much will happen. We would have no Apple, Microsoft, Tesla, Google, Facebook, or Amazon if these innovators had just abandoned their ideas because someone came up with a worst case scenario. 7 A B C D Details of McCormick Plant Proposal As you know from Project 4, McCormick & Company is considering a project that requires an initial investment of $350 million to build a new plant and purchase equipment. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The new plant will be built on some of the company's land, which has a current, after-tax market value of $14 million. You have been asked to refine your work to include the correct tax impact of depreciation, and the cash flow impact of working capital on the capital budget evaluation. The investment will be depreciated as a modified accelerated cost recovery system (MACRS) seven-year class asset. The correct depreciation table is included at the right. Year 16 The company will need to finance some of the cash to fund $17 million in receivables and $14 million in Inventory starting at year zero. The company expects vendors to give free credit on purchases of $15 million (accounts Payable). Add the net cash outflow for working capital to the cash outflow for the plant, equipment and land in year zero. The $17 million for receivables and the $14 million for Inventory are cash outflows. The $15 million for receivables is a cash inflow. Assume that this net working capital is recovered as a cash inflow in year 21. Instructions Cost of Capital Capital Budgeting O Type here to search e Year Table 1 MACRS Depreciation $350 7 Year class Depreciation 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 8.93% $31.26 8 4.46% $15.61 Table 2 A B C Cash from Cash outflow, Revenue in expenses in Depreciation in Taxable income Tax in $Millions $Millions $ Millions $Millions in $ Millions 27.5% rate $1,800 $1,728 $50.02 $21.99 $6.05 co Instructions Cost of Capital Capital Budgeting 7 15 Year After tax Cash Flow In $Millions $65.95 1 OSA corn do CZ O Type here to search M 2 $1,900 $1,824 $85.72 3 $2,000 $1,920 $61.22 $2,100 $2,016 $43.72 $2,200 $2,112 $31.26 $2,300 $2,208 $31.22 $2,400 $2,304 $31.26 $2,500 $2,400 $15.61 $2,600 $2,496 $2,700 $2,592 $2,600 $2,496 $2,500 $2,400 $2,400 $2,304 14 $2,200 $2,112 15 $2,000 $1,920 $1,800 $1,728 $1,500 $1,440 18 $1,200 $1,152 19 $800 $768 Instructions Cost of Capital Capital Budgeting 11 ANNNNSSAMME -$9.72 $18.79 $40.29 $56.75 $60.78 $64.75 $84.39 $104.00 $108.00 $104.00 $100.00 $96.00 $88.00 $80.00 $72.00 $60.00 $48.00 $32.00 1 con -$2.67 $5.17 $11.08 $15.60 $16.71 $17.80 $23.21 $28.60 $29.70 $28.60 $27.50 $26.40 $24.20 $22.00 $19.80 $16.50 $13.20 $8.80 $78.67 $74.83 $72.92 $72.40 $75.29 $78.20 $76.79 $75.40 $78.30 $75.40 $72.50 $69.60 $63.80 $58.00 $52.20 $43.50 $34.80 $23.20 12 17 AAA cal Type here to search 20 $23.20 $27.60 Year $800 $768 $32.00 $8.80 $400 $384 $16.00 $4.40 Table 3 A B Tax in Millions Cash from Cash outflow, 27.5% rate in Revenue in expenses in Depreciation in Taxable income years 1, 2, 3 and $Millions $Millions $Millions in $ Millions 50% there after 1 $1,800 $1,762.56 $50.02 -$12.57 -$3.46 $1,900 $1,860.48 $85.72 -$46.20 -$12.70 $2,000 $1,958.40 $61.22 $19.62 -$5.40 $2,100 $2,056.32 $43.72 -$0.04 -$0.02 5 $2,200 $2,154.24 $31.26 $14.50 $7.25 6 $2,300 $2,252.16 $31.22 $16.62 $8.31 7 $2,400 $2,350.08 $31.26 $18.67 $9.33 $2,500 $2,448.00 $15.61 $36.39 $18.20 9 $2,600 $2,545.92 $0.00 $54.08 $27.04 10 $2,700 $2,643.84 $0.00 $56.16 $28.08 Crno en Instructions Cost of Capital Capital Budgeting + 2 After tax Cash Flow In Millions $40.90 $52.22 $47.00 $43.70 $38.51 $39.53 $40.59 $33.80 $27.04 $28.08 enza 8 5 CA ennn - O Type here to search Bte A LBe W M $0.00 13 14 15 $2,600 $2,500 $2,400 $2,200 $2,000 $1,800 $1,500 $1,200 $800 $400 N $2,545.92 $2,448.00 $2,350.08 $2,154.24 $1,958.40 $1,762.56 $1,468.80 $1,175.04 $783.36 $391.68 $54.08 $52.00 $49.92 $45.76 $41.60 $37.44 $31.20 $24.96 $16.64 $8.32 $27.04 $26.00 $24.96 $22.88 $20.80 $18.72 $15.60 $12.48 $8.32 $4.16 $27.04 $26.00 $24.96 $22.88 $20.80 $18.72 $15.60 $12.48 $8.32 $4.16 17 18 19 20 Instructions Cost of Capital Capital Budgeting + Type here to search 2 N 3. E F G H J K L M McCormick & Company is considering building a new factory in Largo, Maryland, James Francis, a landowner, is selling a 4.35 acre parcel of industrial zoned land with a listed sale price of $3,000,000.00 for the land. McCormick & Company is interested in the land and so is another manufacturing company. The competing manufacturing company has made a full offer of $3,000,000.00 for the land. McCormick & Company knows it can make an offer to outbid the competitor to obtain the land. So, McCormick & Company decided to offer $4,424,000.00. Now, the landowner must make a decision between the two competing offers. To make this decision, James should first identify the Future Value (FV) of each offer. James's bank is offering a 12 percent interest rate when invested through the bank-managed growth stock portfolios. Let's help James make his decision by answering the following questions using the template to the right. 1. What is the Future Value (FV) of each offer? FV=13,740,272 What is the two competing offers? Unknown manufacturing company makes an for $3,000,000.00 and McCormick & Company makes an offer $4,424,000.00. 14 15 2. Based on your Future Value calculations, which offer should James accept? James should accept the offer from McCormick and Company McCormick & Company has decided in order for the company to have a minimal impact on current cash flows, the company will need to borrow 70 percent Loan to Value (LTV) of the $4,424,000.00 offer in the form of a commercial acquisition and development loan to purchase the land. This means McCormick & Company will need to make a 30 percent down payment to secure the commercial acquisition and development loan. McCormick & Company is consiglering three different loan options: Loa Loan A Loan B Loan C 22 23 Loan A: 20-year loan with a fixed annual interest rate of 6 percent Loan B: 10-year loan with a fixed annual interest rate of 4.5 percent Loan C: 15-year loan with a fixed annual interest rate of 5 percent Loar Loan A Loan B Ton 25 3. How much of the total 54,424,000.00 offer will be financed? 3,096,800 Instructions Financing and Investing Corporate Valuation Annuities F G K L M 4. Which loan will have the lowest monthly payment? Loan A 5. Which loan will have the lowest total payback amount? Loan B $3,913,699.35 | 6 Loc 6. Would you recommend McCormick & Company select the loan with lowest monthly payment or lowest total payment and why? I recommend McCormick select the loan with the lowest total payback amount should be accepted as overall, it will have the lowest Instructions Financing and Investing Corporate Valuation Annuities PMT FV PV $4,424,000 10 12% ($13,740,272.47) IN PV PMI FV 12% $ 4,424,000.00 ($13,740,272.47) 3 Principal Percent Down Amount Financed 30% $ 3,096,800.00 Loan Loan A Loan B Loan C PV 6 % $ 3,096,800.00 4.5% $ 3,096,800.00 5% $ 3,096,800.00 PMT ($269,993.14) ($391,369.94) ($298,352.80) BE Loan Loan A Loan B Loan C 6% 4.5% 5% PV $3,096,800 $3,096,800 $3,096,800 PMT $269,993.14 $391,369.94 $298,352.80 Total Paid $5,400,000.00 $3,913,699.35 $4,475,291.94 6 Loan B Instructions Financing and Investing Corporate Valuation Annuities Type here to search WN IK L Now that McCormick & Company has secured the land for the new factory through a loan, it is time to construct the new factory. Instead of using operating cash flow to fund the construction of the new factory, McCormick & Company has decided to raise capital. To raise additional capital, the company is considering issuing additional shares of stock. For McCormick & Company to determine how much it will cost the company to issue stock, the company must determine the expected return on the stock in relation to the systematic risk. We can help McCormick & Company with this by answering the following questions using the provided information below: McCormick & Company uses the 10-Year Treasury Constant Maturity Rate as the risk-free rate. As of 7/1/2019, this was 2.03 according to the US Treasury. McCormick & Company has disclosed the company's levered Beta is 0.60 (MarketWatch, 7/1/2019). McCormick & Company has disclosed the company's expected return on the market is 8.03% To answer the following questions, use the template to the right. 1. What is McCormick & Company's expected return on the issuance of stock using CAPM? risk fre Beta expect risk fre 2 R 17 In the CAPM, we examined the expected return on the market as a whole. In an effort to estimate the expected return of McCormick & Company's stock, we will use the Dividend Discount Model (DDM). We can help McCormick & Company with this by answering the following questions using the provided information below: McCormick & Company's expected dividend per share next year is $2.28 McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019) McCormick & Company's cock price per share was $155 70 on 7/1/2019 Instructions Financing and Investing Corporate Valuation Annuities O Type here to search A B C D McCormick & Company's expected dividend per share constant growth rate is 8.70% (as of May 2019T McCormick & Company's stock price per share was $155.70 on 7/1/2019 Div 2. Using the Dividend Discount Model (DDM), what is the cost of equity? To find the cost of equity using DDM, we take the original equation and rearrange the equation: Div Rs = +g - Rs-g Instructions Financing and Investing Corporate Valuation Annuities M N = O + T 1 U P B X (RM -RE) V R W Rp X Expected return = 5.63 risk free rate= 2.03 Beta 0.6 expected market return risk free rate 2 RS 8.03 2.03 expected dividend= current stock prices constant growth rate= 2.28 155.7 0.087 cost of equity= 0.101644 or 10.16% Instructions Financing and Investing Corporate Valuation Annuities O Type here to search