Question 5 Moon Rhee Auto Supply, a Korean supplier of parts to Kia Motors, is evaluating an opportunity to set up a plant in Alabama, where Kia Motors has an auto assembly plant for its SUVs. The cost of this plant will be $13.5 million. The current spot rate is 946.53 Korean won per U.S. dollar. The company uses a discount rate of 9 percent for projects in the United States. The company is expected to use this plant for the next five years and is expecting to generate the following cash flows. Years 2 3 4 5 Cash flows (US millions) 2.3 4.2 3.6 5.8 7.6 Expected exchange rate (Korean won/$) 932.031 923.632 956.155 952.221 943.670 Required What is the NPV of this project? Should Moon Rhee Auto Supply take on this project? Please Explain. [Total for question 5 = 14 marks]Question 6 Use the following information concerning Johnson Machine Tools Ltd in Part a & b. Johnson's income statement from the fiscal year that ended this past December is: Revenue $995 Cost of sales 652 Gross profit $343 Selling, general, & administrative expenses 135 Operating profit (EBIT) $208 Interest expense 48 Earnings before tax $160 Tax 64 Profit $ 96 All dollar values are in millions. Depreciation and amortisation expenses last year were $42 million, and the company has $533 million of debt outstanding. You are an analyst at a company that buys private companies, improves their operating performance, and sells them for a profit. Your boss has asked you to estimate the fair market value of the Johnson Machine Tools Ltd. Billy's Tools is a public company with business operations that are virtually identical to those at Johnson. The most recent income statement for Billy's Tools is as follows:Revenue $1,764 Cost of sales 1,168 Gross profit $ 596 Selling, general, & administrative expenses 211 Operating profit (EBIT) $ 385 Interest expense 12 Earnings before tax $ 373 Tax 147 Profit $ 226 All dollar values are in millions. Billy's had depreciation and amortisation expenses of $71 million last year and 200 million shares and $600 million of debt outstanding as of the end of the year. Its share is currently trading at $12.25 per share. Required Part (a) Using the P/E multiple, what is the value of Johnson's shares? What is the total value of Johnson Machine Tools Ltd? [8 marks] Part(b) Using the enterprise (company) value/EBITDA multiple, what is the total value of Johnson Machine Tools Ltd? What is the value of Johnson's shares? [8 marks] [Total for question 6 = 16 marks]Question 7 Victoria Home Brew forecasts that if it sells each bottle of HBrew for $20, then the demand for the product will be 15,000 bottles per year, whereas sales will be 90 percent as high if the price is raised 10 percent. Victoria's variable cost per bottle is $10, and the total fixed cash cost for the year is $100,000. Depreciation and amortisation charges are $20,000, and the company is in the 30 percent tax rate. The company anticipates an increased working capital need of $3,000 for the year. Required Part (a) What will be the effect of a price increase on the company's FCF for the year? Present your solution in statement format. [10 marks] Part (b) Sensitivity analysis and scenario analysis are similar. Describe which is a more realistic method of analysing different scenario impacts on a project. [4 marks ] [Total for question 7 = 14 marks]
