Scenario: Shantel Joshi , the CFO for the firm PSUWC Designer Womens Tops Company, LLC, woke up with a start at 4:00 am on 12/4/22, due to the phone ringing. It was the firms senior financial analyst, vacationing in Europe, calling with bad news. Shantel was supposed to present the project evaluation, at the end of the week, for the Board's proposal that they invest in new equipment which would enable them to add a new product line. Currently PSUWC has four successful products and they are considering selling a new Designer Womens Tops line. Due to relatively rapid advances in technology, the project was expected to be discontinued in four years. The new Designer Womens Tops was expected to sell for $ 80 per unit and had projected sales of 4400 units in the first year, with a projected (Most-Likely scenario) 19.0 % growth rate per year for subsequent years. A total investment of $ 1,061,000 for new equipment was required. The equipment had fixed maintenance contracts of $ 237,033 per year with a salvage value of $ 156,966 and variable costs were 13 % of revenues. Shantel also needed to consider both the Best-Case and Worst-Case scenarios in the analysis with growth rates of 29.00 % and 1.90 % respectively.

The new equipment would be depreciated to zero using straight line depreciation. The new project required an increase in working capital of $ 188,810 and $ 33,986 of this increase would be offset with accounts payable. PSUWC currently has 1043000 shares of stock outstanding at a current price of $ 78.00. Even though the company has outstanding stock, it is not publicly traded and therefore there is no publicly available financial information. However, after analysis management believes that its equity beta is 1.33.

The company also has 107000 bonds outstanding, with a current price of $ 908.00. The bonds pay interest semi-annually at a coupon rate of 3.80 %. The bonds have a par value of $1,000 and will mature in 14 years. The average corporate tax rate was 35 %. Management believes the S&P 500 is a reasonable proxy for the market portfolio. Therefore, the cost of equity is calculated using the company's equity beta and the market risk premium based on the S&P 500 annual expected rate of return - Shantel would calculate the monthly expected market return using 5 years of past monthly price data available in the worksheet Marketdata. This would then be multiplied by 12 to estimate the annual expected rate. Shantel remembered that if the expected rate of return for the market was too low, too high, or negative, a forward looking rate of an historical average of about 9.5% would have to be used, as the calculated value for the current 5-year period may not be representative of the future. Shantel would consider a E(Rm) between 8-12% acceptable. Shantel would calculate the market risk premium: E(Rm) - Rf from the previous calculations using the risk-free rate data available in the worksheet Marketdata. Shantel noted that the risk-free rate was on an annual basis.

CHECK IF THE NUMBERS THAT ARE HIGHLIGHTED AND IN PINK AREAS ARE CORRECT PLEASE.

c F G \begin{tabular}{|l|r|l|r|r} \hline Parameters & & & \\ \hline Market Value of Equity & $81,354,000.00 & \# of Shares Outstanding & 1043000 \\ \hline Market Value of Debt & $97,156,000.00 & \# of Bonds Outstanding & 107000 \\ \hline Total Market Value & $178,510,000.00 & Market Price of Bonds & $9 & 908.00 \\ \hline Weight of Equity & 45.57% & Market Price of Stock & $8.00 \\ \hline Weight of Debt & 54.43% & & \\ \hline E (Rm) & 9.50% & & \\ \hline Rf & 3.3% & Bond Info Provided for your convenience \\ \hline & 1.33 & Years to Maturity & \multicolumn{2}{|c|}{14} \\ \hline Cost of Equity (re) & 11.55% & PMT & $38.00 \\ \hline Cost of Debt (rd) & 4.70% & FV & $1,000 \\ \hline After-Tax Cost of Debt & 3.06% & Before tax YTM & 4.70% \\ \hline WACC & 6.93% & Before tax YTM 2 & 9.41% \\ \hline \end{tabular} c F G \begin{tabular}{|l|r|l|r|r} \hline Parameters & & & \\ \hline Market Value of Equity & $81,354,000.00 & \# of Shares Outstanding & 1043000 \\ \hline Market Value of Debt & $97,156,000.00 & \# of Bonds Outstanding & 107000 \\ \hline Total Market Value & $178,510,000.00 & Market Price of Bonds & $9 & 908.00 \\ \hline Weight of Equity & 45.57% & Market Price of Stock & $8.00 \\ \hline Weight of Debt & 54.43% & & \\ \hline E (Rm) & 9.50% & & \\ \hline Rf & 3.3% & Bond Info Provided for your convenience \\ \hline & 1.33 & Years to Maturity & \multicolumn{2}{|c|}{14} \\ \hline Cost of Equity (re) & 11.55% & PMT & $38.00 \\ \hline Cost of Debt (rd) & 4.70% & FV & $1,000 \\ \hline After-Tax Cost of Debt & 3.06% & Before tax YTM & 4.70% \\ \hline WACC & 6.93% & Before tax YTM 2 & 9.41% \\ \hline \end{tabular}