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 represent 40% of the market for gelati.You invested $14 million recently as part of your plan for this investment for plans and property.$10 million of that amount was used to purchase the land that you plan on using for this operation.This land is currently worth $12 million.$2 million of this amount was used for equipment that is about to be depreciated for the last time but could be sold today for $1 million.You would have to invest - if you go forward with the project - another $5 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 5% of the gelati market.This would cannibalize some of your existing sales, however, in the amount of 8%.On the other hand, you believe that there will be some synergies with your existing business resulting in an increase in the amount of sales by $5 million - to be earned each year; although you did expect to get 20% of that even without the venture.Costs of goods sold are always 50% of sales.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 $3 million of fixed overhead from headquarters and another $2 million to be spent 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 milloin in CAPX to continue the business indefinitely with a long term growth rate of 1% annually.

Your annual figures are flat for the five year horizon and then free cash flows are expected to grow 1% per year afterwards as noted above.

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% AAA debt. Assume beta of debt = 0.Note it is net debt not gross debt that ultimately matters.

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

Treasury

SecurityRate

3-month T-bill2%

5-Year T-bond3%

30-year T-bond4%

AAA debt5%

Market Risk Premium over Treasury Bonds is 6%

Your FirmAlati GelatiIceman Cometh

Stock Price$70 $30$25

Total Book Capitalization$600 Million$900 Million$700 Million

Leverage Ratio (Book)20%25%20%

Shares Outstanding22 Million30 Million 30 Million

Cash$0 Million$0 Million$0 Million

Beta (Yahoo Finance)1.3 1.11.0

Total Sales$250 Million$200 Million $200 Million

Gelati Sales$0 Million$200 Million$200 Million

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