Question 5 [3 points] Cohen Inc. is a manufacturer of sports drinks and operates primarily in the East Coast of the U.S. The company is currently financed by all equity, which has a book value and market value of $400 million. It has negligible cash. The firm expects to generate $60 million in EBIT on revenue of $500 million in Year 1. The risk free rate is 2.5%, the tax rate is 40%, and the equity risk premium is 6%. The beta for the stock is 1.00. Cohen Inc. expects its EBIT to grow at 2.5% forever. a. Estimate the ROIC based on beginning invested capital. [0.25 point] b. Estimate the Reinvestment Rate. [0.25 point] c. Estimate the intrinsic value of the company's operating assets. [0.5 point] Lester Burnham, an experienced executive from the West Coast, has just signed on to be Cohen's new CEO. Mr. Burnham is planning to make some changes to Cohen. Cohen will raise $100 million of bank loans at once to finance the expansion into the West Coast market. The pre-tax cost of the bank loans is 4.5%. The expansion is expected to generate $160 million in additional revenues in the West Coast in Year 1, and these revenues are expected to grow 2.5% p.a. in perpetuity. The operating margin on West Coast sales is expected to be 14%. The business in the East Coast and the market value of the equity will not be affected by this expansion. Estimate the following after implementation of the changes described above: d. What is the new beta for Cohen? [0.5 point] e. What is the cost of capital (WACC)? [0.5 point] f. What is the new ROIC [0.25 point)? g. What is the value of the operating assets? [0.5 points] h. What is the value of equity? [0.25 point] Question 5 [3 points] Cohen Inc. is a manufacturer of sports drinks and operates primarily in the East Coast of the U.S. The company is currently financed by all equity, which has a book value and market value of $400 million. It has negligible cash. The firm expects to generate $60 million in EBIT on revenue of $500 million in Year 1. The risk free rate is 2.5%, the tax rate is 40%, and the equity risk premium is 6%. The beta for the stock is 1.00. Cohen Inc. expects its EBIT to grow at 2.5% forever. a. Estimate the ROIC based on beginning invested capital. [0.25 point] b. Estimate the Reinvestment Rate. [0.25 point] c. Estimate the intrinsic value of the company's operating assets. [0.5 point] Lester Burnham, an experienced executive from the West Coast, has just signed on to be Cohen's new CEO. Mr. Burnham is planning to make some changes to Cohen. Cohen will raise $100 million of bank loans at once to finance the expansion into the West Coast market. The pre-tax cost of the bank loans is 4.5%. The expansion is expected to generate $160 million in additional revenues in the West Coast in Year 1, and these revenues are expected to grow 2.5% p.a. in perpetuity. The operating margin on West Coast sales is expected to be 14%. The business in the East Coast and the market value of the equity will not be affected by this expansion. Estimate the following after implementation of the changes described above: d. What is the new beta for Cohen? [0.5 point] e. What is the cost of capital (WACC)? [0.5 point] f. What is the new ROIC [0.25 point)? g. What is the value of the operating assets? [0.5 points] h. What is the value of equity? [0.25 point]
