1. You are a profitable conglomerate thinking about getting into the gelati business.Current info for you and pure play gelati businesses is listed below.Your investment will be $100 million, 80% of which is CAPX (to be straight-line depreciated over five years) and the remainder NWC. You will also use land that you bought in preparation for this project at a cost of $10 million two years ago.The current value is $9 million due to the real estate market downturn but you expect the price to rebound in the future but would sell today anyway if you did not do the project.You believe you can immediately obtain a 10% market share of the gelati business.Annually, the market is 200 million scoops at an average cost of $3 per scoop plus another $100 million in other gelati-related products. Since you sell other food-related products, you believe that this investment will increase your current annual sales by 2.5%.On the other hand, you also sell some dessert products that will cannibalize your current sales by 10%. However, this investment will thwart plans by your competitors that would have generated a decrease in sales by 5% anyway.Your costs of goods sold are always 30%.You have additional operating expenses on top of depreciation of $16 million per year.Your annual figures are flat for the five year horizon and then free cash flows are expected to grow 3% per year afterwards.But to undertake this, you need to spend on Maintenance CAPX to offset the depreciation.

Note:The corporate tax rate is 20%.Assume that all cash flows are year-end except for the up-front investment.You will finance the project appropriately with $25 Million in AAA debt. Assume beta of debt = 0.

You also have the following financial data pertaining to the market and to your publicly-traded competitors:

Treasury

SecurityRate

3-month T-bill4%

5-Year T-bond5%

30-year T-bond6%

AAA debt8%

Market Risk Premium over Treasury Bonds is 6%

Your FirmGelati Inc Ice Cream Inc

Stock Price$70 $25$20

Total Book Capitalization$600 Million$500 Million$500 Million

Leverage Ratio (Book)20%18%20%

Shares Outstanding 20 Million20 Million30 Million

Cash$12 Million$0 Million$0 Million

Beta (Yahoo Finance)1.0 1.00.9

Total Sales (annual)$400 Million$100 Million $100 Million

Gelati Sales$0 Million$100 Million$100 Million

Using DCF, determine whether you should do take on this investment and what impact it would have on your stock price?

2 You own debt with face amount of $150 Million that you lent to a firm managed by its sole shareholder, whose firm is expected to generate next year either a cash flow of $200 Million or $100 Million - with probabilities .6 and .4, respectively. This is a one-time, one year project and then the firm will be shut down.In addition there is a project P that will generate guaranteed cash flow of $50 Million in one year.This new project requires funding of $40 Million which the firm does not have, and so say he would have to issue junior debt to obtain the capital to undertake the project due to the covenants in your debt security.Assume that all cash flows are discounted at 0%.

a)Do you expect the manager to undertake the new project P?Explain how he would acquire the capital - in other words, what is the face value for the new junior debt.(The existing debt had a pari passu covenant it turns out)?

b)The manager asks you to forgive $30 million in debt down to a new face value of $120 million.Again calculate what the face value would need to be for the junior debt and determine if the manager will now undertake the project with this restructuring plan.

c)Would you push to adjust the terms of this restructuring (request for the debt forgiveness of $30 million)?Explain. What percentage of the equity would you ask for so that you each split the surplus of the restructuring 50-50.