Silkworm Inc is a manufacturer of construction equipment, machinery and engines. It also sells financial services. You anticipate a substantial increase in its machinery sales. You have the following data. US$ '000 Net sales COGS SG&A 2018 39,867 30,367 4,248 2019 57,392 43,578 5,203 and thus in percentage terms: % of sales Net sales COGS SG&A 2018 100 76.2 10.7 2019 100 75.9 9.1 a) Estimate the fixed and variable components of COGS and SG&A in 2019. What would be your estimate of operating profits for 2020 if predicted net sales for 2020 were US$ 100,000,000? Briefly comment on whether your analysis makes sense. What are the advantages and disadvantages of this approach? (7 marks) b) You have the following information for Butterfly Inc. US$ million Intangible assets Property, plant and equipment Inventory Operating liabilities Interest-bearing debt Equity 2019 270 180 120 180 125 265 2018 250 170 120 150 125 265 Sales revenue Operating expenses Depreciation & amortisation Interest expense Taxation Profit for the year 2019 200 51 30 9 33 77 The company has no interest income. Calculate the 2019 FCF (free cash flow) for Butterfly Inc. (6 marks) c) Butterfly Inc's interest bearing debt is a bond with a coupon of 6%, currently trading in the bond market at par (i.e. 100.00% of nominal value). At the end of 2019, its non-current assets have all been revalued to fair value, and the book value of its inventory also equals its fair value. Assume that the CAPM is an appropriate model for estimating the company's cost of equity capital; and that Butterfly Inc's tax rate is 30% and its equity beta is 0.8; the risk free rate is 2%, and the expected return on an appropriate stock market index 10%. Calculate the market value of Butterfly Inc's equity and its WACC (weighted average cost of capital) (6 marks) d) Briefly explain why the market value of Butterfly Inc's equity calculated in part (c) exceeds its book value. (3 marks) e) Briefly outline the weaknesses of the CAPM model