The following information is from recent balance sheets and income statements for Classic Films Studios. The company is planning to launch a new service next year that is expected to last for 8 years before it will become out of date/obsolete. Senior management needs to make a decision about whether or not to invest in the assets that will generate the cash flow from assets this new service will generate. The Marketing/New Product Development Group has provided estimates for the amount of assets needed and the expected cash flow from assets for the eight years. As a member of the Finance Group, you are being asked to advise the company's Chief Financial Officer about the merits of investing in this new service. To do that, you will need to use the financial information provided to answer address the problems/questions found below. Many of the problems do not have to be answered using Excel, however you will need to use some Excel functions to find the new service's IRR and he NPVs under the different funding scenarios. You can refer to all documents, including answers to the problems you have done during the semester, while working on this exam. And you are welcome to ask questions about it. Put your answers in the separate Final Answer Sheet Word document and upload it in Canvas. If you want to show your work, do that in a separate document. Questions 1 through 23 are worth 2 points each. 24a - 24d and 25a - 25d are worth 3 points each, and question 26 is worth 5 points for a total of 75 points. ($ millions) 2021 2022 Total Assets $ 600.00 $ 700.32 Total Debt $ 200.00 $ 233.12 Total Equity $ 400.00 $ 466.88 Net Income $ 95.50 $ 116.50 Dividends $ 38.20 $ 46.60 Add to RE $ 57.30 $ 69.90 ROA ROE Tax Rate 30.00% Pre-Tax Market Cost of Debt 13.50% Cost of Equity 25.00% Book Value of 2022 Long Term Debt $ 210.00 Market Price of 2022 Long Term Debt $ 970.00 Market Value of 2022 Long Term Debt Market Value of 2022 Equity $ 500.00 Assets Needed for New Service: $ 180.00 Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Yeat 8 New Service Cash Flow from Assets $ (180.00) $ 37.00 $ 44.00 $ 54.00 $ 65.00 $ 64.00 $ 54.00 $ 40.00 $ 25.00 New Service Internal Rate of Return New Service Net Present Value Questions: 1. What if Classic Films Studio's ROA in 2021 and 2022? Take to 4 decimal points. 2. What is Classic Films Studio's ROE in 2021 and 2022? Take to 4 decimal points. 3. What was Classic Films Studio's retention ratio in 2021 and 2022? Take to 2 decimal points. 4. What was Classic Films Studio's Sustainable Growth Rate in 2021? Take to 4 decimal points. 5. What was the percent increase in Total Assets from 2021 to 2022? Take to 4 decimal points. 6. Did Classic Films Studios grow its assets by its Sustainable Growth Rate in 2022? 7. What is Classic Films Studio's 2022 Sustainable Growth Rate? Take to 4 decimal points. 8. Is the planned increase greater causing the company to grow by more than the sustainable growth rate? 9. Will the company need external financing to fund the new service? 10. What is Classic Films Studio's 2022 Book Value Debt to Equity Ratio? Take to 2 decimal points. 11. What is the market value of debt in 2022? 12. What is the market value of equity in 2022? 13. What is Classic Films Studio's total market value in 2022? 14. What is Classic Films Studio's 2022 Market Value Debt to Equity Ratio? Take to 2 decimal points. 15. What is Classic Films Studio's 2022 after tax weighted average cost of capital? Take to 4 decimal points. 16. What is the planned new service's internal rate of return? Take to 4 decimal points. 17. Using the current market value weighted average cost of capital, what is the new service's NPV? Take to 2 decimal points, e.g., x.xx). 18. What is Classic Films Studios new market value of assets after investing in the new service? Take to 2 decimal points (e.g., x.xx). 19. How much equity does the company need to keep the company's market value debt to equity ratio constant? Take to 2 decimal points, e.g. x.xx. 20. How much equity has to be added? Take to 2 decimal points, e.g., x.xx. 21. How much debt is neeeded to keep the company's market value debt to equity ratio constant? Take to 2 decimal points, e.g., x.xx. 22. How much debt has to be added? Take to 2 decimal points, e.g., x.xx. 23. Has the debt to equity ratio changed? Take to two decimal points. 24. Find the new WACC under these conditions (take all answers to 4 decimal points): a. Adding equity increases the cost of equity by 1.5 percent and cost of debt stays the same. b. Adding debt increases the cost of debt by 1.5 percent and the cost of equity stays the same. c. You fund the new service with all equity but the cost of equity increases by 3 percent. The cost of debt stays the same. d. You fund the new service with all debt but the cost of debt increases by 2.5 percent and the cost of equity increases by 3.5 percent. 25. Find the new NPV under the above conditions. Take all to 2 decimal points, e.g., x.xx. a. Adding equity increases the cost of equity by 1.5 percent and cost of debt stays the same. b. Adding debt increases the cost of debt by 1.5 percent and the cost of equity stays the same. c. You fund the new service with all equity but the cost of equity increases by 3 percent. The cost of debt stays the same. d. You fund the new service with all debt but the cost of debt increases by 2.5 percent and the cost of equity increases by 3.5 percent. 26. Should the new service be added and, if so, how should it be funded? Bonus What would the average change in yearly cash flow from assets have to be so that the project's NPV would be $0 under the WACC you chose?