SallyCare is an American retailer. The company president is Petter, who inherited the company. When the company was founded over 30 years ago, it originally focuses on producing food for children. Over the years, the company still maintains its primary business, accounting for about 50 percent of its total revenue. Faced with stiff competition, the company also expanded into the business of manufacturing toys and games for children.

As of now, SallyCare's only game model is a strategy card game named the CatCompete (CC), and sales have been excellent. SallyCare's main competitor in the toy marketis Hasbro, Inc(HAS). SallyCare's CC is similar to the Hasbro Monopoly model but with a more elaborate design. However, SallyCare wants to incorporate a new card game model, the CatWin (CW), into their lineup. SallyCare spent $500,000 to develop the new CW, which features a more complex structure, and more user friendly than the existing CC game. The company has spent a further $120,000 on a marketing study to determine the new toy model's expected sales figures.

SallyCare can manufacture the new model for $18 per game in variable costs. Fixed costs for the operation are estimated to run $300,000 per year. The estimated sales volume is 50,250; 62,367; 52,084; 36,875 and 20,630 games per year for the next five years, respectively. The unit price of the new model will be $50. The necessary equipment can be purchased for $500,000 and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $240,000.

As previously stated, SallyCare currently manufactures the CC. Production of the existing product is expecting to be terminated in three years. If SallyCare does not introduce the new CW product, sales of the existing product will be 113,000, 160,050 and 89,500 games per year for the next three years, respectively. The price of the existing game is $34 per game, with variable costs of $14 each and fixed costs of $3 million per year. If SallyCare does introduce the new game, sales of the existing one will fall by 12,000 games per year, and the price of the existing game will have to be lowered to $25 each game. Net working capital for the project will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in Year 1 with the first year's sales. SallyCare has a 20 percent corporate tax rate. The company has a target debt to equity ratio of 0.5 and is currently BBB-rated (according to S&P 500 ratings). The overall cost of capital of the company is 8 percent.

QUESTION:

Petter is also interested in the cost of capital of the game industry. Therefore, he asks you to find the cost of equity, the cost of debt, and the WACC of HAS. Please demonstrate your computational steps and document the data sources used and any assumptions you make.