The company the gnomes cave produces costumes, which are fabricated in their local plan in Puebla. At the end of 2019 the companys balance showed the following structure:

Total assets: $10000,000

Total debt: $3500,000

Preferred shares $1000,000

Common shares: $5500,000

Their estimates for 2020 are the following

Sales: 125,000 units

Price per unit: $200.00

Variable costs: $84.00

Fixed costs: $10000,000 (depreciation not included)

Interest expenses: $525,000

Within the companys plans, they are estimating an annual sales growth of 8%. Inflation is estimated to be 3.5% for the next 10 years. The companys prices and costs will modify according to inflation.

The company is evaluating the possibility to replace their oldest piece of equipment, to a new machine that has automated control which will allow the company to reduce their maintenance cost and increase the production volume and sales.

The machine has a book value of $360,000 by the end of 2019 and the estimated value it can be sold at is $550,000. The asset was purchased at a price of $1200,000 and with a machine life of 10 years. The operating manager confirms that due to the god maintenance given to the machine, it could continue to operate for an additional 10 years y management were to decide to keep it.

The new equipment has a price of $6500,000 and requires moving expenses of $180,000 and installation expenses of $121,000. Machine life is 10 years, and it will depreciate in a straight line method until reaching a value of 0 at the end of the 10 years. This equipment requires working capital of $300,000, which will increase year over year in the same proportion as sales do.

If the new machine was installed, sales estimates for 2021 would be the following

Sales volumes: 150,000 units

Price per unit $210.00

Variable costs: $82.00

Fixed costs: $12000,000 (depreciation not included)

Interest expenses: $525,000

Annual growth of sales for the next ten years, if the new equipment were to be installed, would be of 9%. Inflation estimates stay the same.

The interest rate being paid on debt is 15%. Preferred shares are paying an annual dividend of $200 and the price of the share is $1,400.

Common shares have a price of $1,000 and pay a dividend of $250 per share. The dividend has an annual growth rate of 5%.

The companys tax rate is 30%. In order to maximize shareholder value, the company established a premium of 250bps above the minimum rate of return required for this type of investment.

Calculate the following

1. Calculate the companys cost of capital

2. Determine whether its viable to acquire the new machine using IRR, NPV, and IR

3. Calculate the breakeven point for 2021

4. Calculate the degree of operating leverage, degree of financial leverage and degree of combined leverage

5. Assuming the company doesnt have certainty about future dividends and would rather calculate their stockholders equity using the CAPM model, the risk-free rate is 5%. The markets expected rate of return is 30% and the companys beta is 1.2. Calculate WACC

6. Assume that the cash flows in question 2 are the neutral scenario with a probability of 60%. The pessimistic scenario would me a 15% decrease of the cashflows in question 2 with a probability of 15%. Additionally, the optimistic scenario would be a 15% increase of the cashflow in question 2 with a 25% probability. Calculate risk level with the volatility index