SleepBetter is an American company located in Kirkland, WA$.$ The company specializes in selling

sheets, pillowcases and comforter when it was founded in $1931.$ Over the years, the company still

maintains its main business, which accounts for about $50$ percent of its total revenue. In $1990,$ the

company entered into the business of manufacturing mattresses due to stiff competition. You and

your team, the Carson College of Business graduates, are hired by the company's finance

department to evaluate a new project for the company.

SleepBetter$$s only mattress type so far is a traditional inner spring called the Beautyrest, and sales

have been excellent. SleepBetter$$s main competitor in the mattresses market is TEMPUR$-$SEALY

International, Inc $($TPX$).$ SleepBetter$$s Beautyrest is similar to the TEMPUR$-$Adapt but is

relatively cheaper. This year, however, SleepBetter wants to incorporate a new high$-$end gel$-$

infused memory foam mattresses, the Kingsdown into their lineup. SleepBetter spent $$13,950,000$

to develop the new Kingsdown which features extreme comfort, pressure relief, better breathability

and air circulation than the existing Beautyrest. The company has spent a further $$550,000$ for a

marketing study to determine the expected sales figures for the new mattresses.

SleepBetter can manufacture the new mattresses for $$2,800$ per mattress in variable costs. Fixed

costs for the operation are estimated to run $$30$ million per year. The estimated sales volume is

$90,870,96,437,94,700,95,432$ and $96,000$ mattresses per year for the next five years, respectively.

The unit price of the new mattress will be $$4,499.$ The necessary equipment can be purchased for

$$460$ million and will be depreciated on a five$-$year MACRS schedule. It is believed the value of

the equipment in five years will be $$300$ million.

As previously stated, SleepBetter currently manufactures the Beautyrest. Production of the existing

product is expecting to be terminated in three years. If SleepBetter does not introduce the new

luxury Kingsdown product, sales of the existing product will be $90,000,89,732$ and $88,679$

mattresses per year for the next three years, respectively. The price of the existing mattress is

$$3,000$ per mattress, with variable costs of $$1,350$ each and fixed costs of $$28$ million per year. If

SleepBetter does introduce the new mattress, sales of the existing one will fall by $6,000$ mattresses

per year, and the price of the existing mattresses will have to be lowered to $$2,799$ each mattress.

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. SleepBetter has a $35$ percent corporate tax rate. The

company has a target debt to equity ratio of $\mathrm{.}6$ and is currently BB$-$ rated $($according to S&P $500$

ratings$).$

The finance department of the company has asked your team to prepare a report to Robert, the

company$$s CEO, and the report should answer the following questions.

$3$

QUESTIONS

$1.$ Can you and your team prepare the income statement and the total cash flow $($CFFA$)$ table for

this new project? Please use these tables to help explain to Robert the relevant incremental

cash flows of this project?

$2.$ The company$$s CEO, Robert, wants to understand the risk of the mattress industry better. Since

SleepBetter$$s main competitor, TEMPUR$-$SEALY $($TPX$),$ is a leading company in this

industry, Robert ask you to perform the following analysis on TPX$.$

a$.$ Using the past N years of data $($ending at $2022$ or $2023)$ to estimate your own beta

and alpha of TPX based on a regression analysis. Document data sources used.

Also explain how long a time period $($from which year to which year$)$ that you

decide to use to perform your estimation, and explain why?

b$.$ Provide your beta and alpha estimates, as well as the statistical significance $($e$.$g$.$ t

ratio, p$-$value$).$ Comment briefly.

$4$

c$.$ Plot the security characteristic line for this company. Clearly show alpha and beta

on the diagram. Is the company correctly priced, overpriced or underpriced?

d$.$ From the above analysis, can you explain to Robert the risk characteristics of TPX

and the mattress industry using the beta you estimated?

$3.$ Robert are also interested in the cost of capital of the mattress industry. Therefore, he asks you

to find the cost of equity, the cost of debt, and the WACC of TPX$.$ Please show your

computational steps clearly and document data sources used and any assumptions you make.

$4.$ According to the recent estimation of SleepBetter$$s finance department, the overall cost of

capital of SleepBetter Inc. is $9\%.$ Can you compute the NPV and IRR of the company$$s new

project? Please show your computation steps clearly $($show your inputs if using financial

calculator or excel sheet$).$

Should Robert take the new project? Why or why not $($Please explain using the NPV and IRR

rules separately$)?$

$*****$ END $*****$