1. You are a profitable conglomerate thinking about getting into the gelati business.Current info for you, and gelati comps are listed below.These comps together represent 40% of all gelati sales.You invested $12 million recently as part of your plan for this investment for plans and property.$8 million of that amount was used to purchase the land that you plan on using for this operation.This land is currently worth $10 million.The rest was used for equipment that is about to be depreciated for the last time but could be sold today for half of the original $4 million.You would have to invest - if you go forward with the project - another $10 million in CAPX that would be straight-line depreciated over the next five years - the horizon of your analysis.You believe you can generate immediately sales of 3% of the gelati market.Your Costs of goods sold are always 40% of sales.You actually had a small amount of gelati sales that you would now cannibalize to 0.On the positive side, you believe this large gelati business will generate an increase in your existing non-gelati sales of 4% as opposed to the 2% increase you were expected to earn. You will need to spend $5 million annually in operating expenses not including depreciation. And you typically apply an overhead allocation which looks to be $5 million each year for this project; this annual expense includes $4 million of fixed overhead from headquarters and another $1 million to be spent on marketing from headquarters to focus on the new gelati business solely. You will also need to set aside 10% of sales for Net Working Capital.After year 5, you will need to spend another $5 million in CAPX to continue the business indefinitely.

Your annual figures are flat for the five year horizon (other than the CAPX in year 5) and then free cash flows are expected to grow from year 5 with inflation afterwards.

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 20% AAA debt. Assume beta of debt = 0.

You also have the following financial data pertaining to the market and to relevant publicly-traded companies:

Treasury

SecurityRate

3-month T-bill1%

5-Year T-bond2%

30-year T-bond3%

AAA debt5%

Market Risk Premium over Treasury Bonds is 6%

Inflation 2%

Your FirmAlati GelatiIceman Cometh

Stock Price$70 $30$25

Total Book Capitalization$600 Million$800 Million$750 Million

Leverage Ratio (Book)20%25%20%

Shares Outstanding 20 Million25 Million 30 Million

Cash$0 Million$0 Million$0 Million

Beta (Yahoo Finance) 1.3 1.21.1

Total Sales$260 Million$210 Million $200 Million

Gelati Sales$10 Million$210 Million$190 Million

Should you undertake this project, and if so, what would happen to your stock price in expectation?[23 points]