. Details You have been hired as a consultant by Ald's, a private American chain of grocery stores headquartered ten miles north of Whittier. The CEO is currently considering a project that would see Ald's add in-store bakeries in its California locations. He has asked you to provide him with a thorough analysis so that he can make the right investment decision. The management team has also been approached by a potential buyer. Your second task in to value the firm. Facts: Over the last fow years, Aldi's California stores have sold ton million bakery products annually All analysis points to this volume remaining steady in the future. If the company were to have an in-house bakery, you estimate that the average cost per product would be $1.10. Aldi's will mark up these products by 15%. To add a bakery, Aldi's would have to shift things around in the store and to purchase bakery equipment for $15,080,000 which would last for a very long time but it would be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. . This project would be financed solely by equity. Aldi's currently pays tax at a rate of 32% You have collected some information about capital market returns (500 Exhibit 1). The CEO wants to see the work behind your analysis. You need to also provide an Excel spreadsheet that supports your conclusions. Part A. Investment Decision a. What is the cost of capital that Aldi's should use for this project? b. Should Ald's undertake this project? Part B. Valuation Suppose that Aldi's balance sheet shows that it has a debt ratio of 0.30 and a credit rating of BB. a. What is Aldi's weighted average cost of capital (WACC)? [The information provided in Tablo 12.3 in the textbook may be helpful hero.] Suppose that Aldi's free cash flows (FCF) are forecasted to be as follows: Year 2021 2022 2023 2024 2025 FCF ($ millions) 1.291 1,355 1,378 1,506 1,510 Starting in 2025 the company expects FCFs to grow at 2% Indefinitely b. Estimate the Aldis enterprise value in 2020 c. How sensitive is your estimate of Aldis enterprise value with respect to the choice of the discount rate and growth rato? Conduct a sensitivity analysis Exhibit 1 Capital Market Return Data (Historical and Current) Prevalling Yields on U.S. Government Securities (December 2020) Annualized Yield to Maturity 1.20% 3-Month T-Bills 1-Year Bonds 1.40% 5-Year Bonds 1.80% 10-Year Bonds 2.30% 20-Year Bonds 2.50% 30-Year Bonds 2.90% Historic Average Total Annual Retums on U.S. Goverment Securities and Common Stocks (1950-2020) Average Annual Return Standard Deviation T-Bills 5.2% 3.0% Intermediate Bonds a 6.4% 6.6% 6.0% 10.8% Long-term Bonds b Large Company Stocks c 14.0% 16.8% Small Company Stocks d 17.8% 25.6% Historic Average Total Annual Returns on U.S. Government Securities and Common Stocks (1929-2020) Average Annual Return Standard Deviation T-Bills 3.8% 3.3% Intermediate Bonds a 5.4% 5.8% Long-term Bonds b 5.5% 9.2% Large Company Stocks 12.7% 20.3% Small Company Stocks d 17.7% 34.1% aPortfolio of U.S. Government bonds with mafurity near 5 years. bPortfolio of U.S. Government bonds with maturity near 20 years. Standard & Poor's 500 Stock Price Index . Details You have been hired as a consultant by Ald's, a private American chain of grocery stores headquartered ten miles north of Whittier. The CEO is currently considering a project that would see Ald's add in-store bakeries in its California locations. He has asked you to provide him with a thorough analysis so that he can make the right investment decision. The management team has also been approached by a potential buyer. Your second task in to value the firm. Facts: Over the last fow years, Aldi's California stores have sold ton million bakery products annually All analysis points to this volume remaining steady in the future. If the company were to have an in-house bakery, you estimate that the average cost per product would be $1.10. Aldi's will mark up these products by 15%. To add a bakery, Aldi's would have to shift things around in the store and to purchase bakery equipment for $15,080,000 which would last for a very long time but it would be depreciated to zero for tax purposes using a 10-year straight-line depreciation schedule. . This project would be financed solely by equity. Aldi's currently pays tax at a rate of 32% You have collected some information about capital market returns (500 Exhibit 1). The CEO wants to see the work behind your analysis. You need to also provide an Excel spreadsheet that supports your conclusions. Part A. Investment Decision a. What is the cost of capital that Aldi's should use for this project? b. Should Ald's undertake this project? Part B. Valuation Suppose that Aldi's balance sheet shows that it has a debt ratio of 0.30 and a credit rating of BB. a. What is Aldi's weighted average cost of capital (WACC)? [The information provided in Tablo 12.3 in the textbook may be helpful hero.] Suppose that Aldi's free cash flows (FCF) are forecasted to be as follows: Year 2021 2022 2023 2024 2025 FCF ($ millions) 1.291 1,355 1,378 1,506 1,510 Starting in 2025 the company expects FCFs to grow at 2% Indefinitely b. Estimate the Aldis enterprise value in 2020 c. How sensitive is your estimate of Aldis enterprise value with respect to the choice of the discount rate and growth rato? Conduct a sensitivity analysis Exhibit 1 Capital Market Return Data (Historical and Current) Prevalling Yields on U.S. Government Securities (December 2020) Annualized Yield to Maturity 1.20% 3-Month T-Bills 1-Year Bonds 1.40% 5-Year Bonds 1.80% 10-Year Bonds 2.30% 20-Year Bonds 2.50% 30-Year Bonds 2.90% Historic Average Total Annual Retums on U.S. Goverment Securities and Common Stocks (1950-2020) Average Annual Return Standard Deviation T-Bills 5.2% 3.0% Intermediate Bonds a 6.4% 6.6% 6.0% 10.8% Long-term Bonds b Large Company Stocks c 14.0% 16.8% Small Company Stocks d 17.8% 25.6% Historic Average Total Annual Returns on U.S. Government Securities and Common Stocks (1929-2020) Average Annual Return Standard Deviation T-Bills 3.8% 3.3% Intermediate Bonds a 5.4% 5.8% Long-term Bonds b 5.5% 9.2% Large Company Stocks 12.7% 20.3% Small Company Stocks d 17.7% 34.1% aPortfolio of U.S. Government bonds with mafurity near 5 years. bPortfolio of U.S. Government bonds with maturity near 20 years. Standard & Poor's 500 Stock Price Index