T. Ulysses Inc., a publicly traded toy manufacturing company, is considering investing in a 5-year joint venture with Lowie Inc, a movie company, to produce animated movies. You have been provided with the following information on the cost of equity and capital of the two companies: Ulysses Inc. Lowie Inc. Cost of equity 9% 12% Cost of capital 7.50% 10% The following are the projected cash flows for Ulysses' share of the joint venture: Time period (years 0 2 3 4 5 Revenues $100 $110 $125 $140 $160 - COGS (includes depreciation) $40 $44 $50 $56 $64 Operating income $60 $66 $75 $84 $96 - Taxes $18 $20 $23 $25 $29 After-tax operating income $42 $46 $53 $59 $67 - (Cap ex - Depreciation) $80 $0 $0 - Change in working capital $5 $5 $5 $5 $5 Cash flow -$80 $37 $41 $48 $54 $62 Estimate the value of the joint venture to Ulysses. (Provide your rationale for the discount rate that you use) (3 points) 2. Lucas Media is a company that is incorporated in Brazil but it operates in three countries: Brazil, the United States and Portugal. You have information on the three countries (and what the average company generates in revenues in that country): Average 10-year Sovereign Standard Standard company: government Sovereign default deviation of deviation of % of Country bond rate Rating spread equity index gov't bond revenues Brazil 8% (in Reais) Baal 1.50% 25% 20% 80% US 2% (in US $ Aaa 0% 20% 15% 75% Portugal 7.5% (in Euros) Caa 6.00% 30% 20% 60% The implied equity risk premium for the US is 7% but cannot be computed for Brazil and Portugal. The firm is in two businesses: movies and TV broadcasting, with details below (EV: Enterprise value): Revenues in country (millions) Global sector average Business Brazil US Portugal Unlevered Beta EV/Sales ratio Movies $2.00 $1.40 $0.60 1.2 1.00 TV Broadcasting $0.50 $0.10 $0.40 0.9 3.00