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Reese's Peanut Butter Cups Inc. has a series of 8 percent (coupon rate) bonds outstanding with a total face value of $920 million. The bonds
Reese's Peanut Butter Cups Inc. has a series of 8 percent (coupon rate) bonds outstanding with a total face value of $920 million. The bonds are currently priced at 102 and are due to mature in exactly 14 years. The company's stock is currently trading at a price of $25 per share. On average, if the stock market goes up 1%, Reese's stock goes up 1.1%. If the stock market goes down 1%, Reese's stock goes down 1.1%. There are 150 million shares of common stock outstanding. The risk-free rate of interest is 3.0%. You believe that investors require an additional 5.7% return above the risk-free rate as compensation for investing in the market. Reese's marginal tax rate is 21%. Reese's is planning to introduce a new raspberry-flavored peanut butter cup which it will produce for five years. The initial cost of equipment will $15 million, which can be depreciated on a straight-line basis over the life of the project. You will need $1 million of working capital immediately and that level of working capital will be maintained throughout the life of the project (no increases or decreases). The working capital will be recovered when the project ends. Based on the results of a recently concluded test market, sales are expected to be $10 million per year. $1.8 million was spent on the test market. Variable costs for the new flavor are expected to be 20 percent of sales, just as they are for the traditional flavor. There are no fixed costs. The new flavor is expected to cause a $3.15 million drop in sales of the traditional flavor during the first year only. All cash flows should be discounted at the same rate. Determine the appropriate free cash flows to use for an NPV analysis and show them on a simple timeline like you see below (in millions of dollars). Next, determine the WACC that Reese's should use, and then calculate the NPV of this project (in dollars and cents). Please carry out the WACC four decimal places in your answer (i.e. 1.2345%)
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