You have been hired as a consultant by Trader Joe's a private American chain of grocery stores headquartered ten miles north of Whittier. The CEO is currently considering a project that would see Trader Joe'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 is tovalue the firm, . . Here are some facts Over the last few years, Trader Joe's California stores have sold ten 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. Trader Joe's will mark up these products by 15% To add a bakery, Trader Joe's would have to shift things around in the store and to purchase bakery equipment for $15,000,000 which will 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. Trader Joe's currently pays tax at a rate of 325 You have collected some information about capital market returns (se Exhibit 1). The CHO asks you to submit answers to following questions in a business memo format. He also wants to see the work behind your analysis - you need to also provide an Tiscel spreadsheet that supports your conclusions in the memo Part I. Investment Decision # What is the cost of capital that Trader for should use for this project? b. Should Trader Joe's undertake this project? Part II Valuation Suppe that Trader Joe's balance sheet shows that it has a debt ratio of 0.0 and a credit rating of B. 2. What is Trader Joe's weighted averapy cost of capital (WACO?|The information provided in Table 12.3 in the textbook may be helpful here) Suppose that Trader Joe's free cash flows (CF) and forecasted to follow Year THIS milion 2021 2032 2023 1.17 2024 1.5 2025 1.510 Starting in 2026 the company expects to grow al 2 indefinitely b. Estimate the Trader enterprise value in 2001 How sensitive is your estimate of Trader Joe enterprise value with respect to the choice of the discount rate and growth raw? Conducta sitivity analysis Exhibit 1 Capital Market Retum Data (Historical and Current) Prowling Yields on US Gement Serunis (December 2020) Annualued Yield to Maturity 3-Month T-Bils 1-Year Bonds 5-Year Bonds 10-Year Bonds 20-Year Bonds 30-Year Bonds 1.20% 1.40% 1.SON 2305 250% Historie Amage Total Anal Returns US Get Securities and Comman Stocks (1950-2020) Standard Average Annual Return Deviation T-Bills 5.25 3.0% Intermediate Blond 6:45 Long-term Blondy 108 Large Company Stock 140 16,8% Small Company Stock 17. 25.6% Historic Avrage Total Annual Rehim S. Grand Stacks 1999-2020) Standard Averare Annual Return Deviation 38 T-Bus Intermediate Bondy Long-term Blond Large Company Stock Small Company Stock 55% 12.7% 17.75 58 9.25 20.3% 1.19 US Goods with writy Sys Portfolio Usame with maturity ar 20 yrs Standard Scenes You have been hired as a consultant by Trader Joe's a private American chain of grocery stores headquartered ten miles north of Whittier. The CEO is currently considering a project that would see Trader Joe'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 is tovalue the firm, . . Here are some facts Over the last few years, Trader Joe's California stores have sold ten 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. Trader Joe's will mark up these products by 15% To add a bakery, Trader Joe's would have to shift things around in the store and to purchase bakery equipment for $15,000,000 which will 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. Trader Joe's currently pays tax at a rate of 325 You have collected some information about capital market returns (se Exhibit 1). The CHO asks you to submit answers to following questions in a business memo format. He also wants to see the work behind your analysis - you need to also provide an Tiscel spreadsheet that supports your conclusions in the memo Part I. Investment Decision # What is the cost of capital that Trader for should use for this project? b. Should Trader Joe's undertake this project? Part II Valuation Suppe that Trader Joe's balance sheet shows that it has a debt ratio of 0.0 and a credit rating of B. 2. What is Trader Joe's weighted averapy cost of capital (WACO?|The information provided in Table 12.3 in the textbook may be helpful here) Suppose that Trader Joe's free cash flows (CF) and forecasted to follow Year THIS milion 2021 2032 2023 1.17 2024 1.5 2025 1.510 Starting in 2026 the company expects to grow al 2 indefinitely b. Estimate the Trader enterprise value in 2001 How sensitive is your estimate of Trader Joe enterprise value with respect to the choice of the discount rate and growth raw? Conducta sitivity analysis Exhibit 1 Capital Market Retum Data (Historical and Current) Prowling Yields on US Gement Serunis (December 2020) Annualued Yield to Maturity 3-Month T-Bils 1-Year Bonds 5-Year Bonds 10-Year Bonds 20-Year Bonds 30-Year Bonds 1.20% 1.40% 1.SON 2305 250% Historie Amage Total Anal Returns US Get Securities and Comman Stocks (1950-2020) Standard Average Annual Return Deviation T-Bills 5.25 3.0% Intermediate Blond 6:45 Long-term Blondy 108 Large Company Stock 140 16,8% Small Company Stock 17. 25.6% Historic Avrage Total Annual Rehim S. Grand Stacks 1999-2020) Standard Averare Annual Return Deviation 38 T-Bus Intermediate Bondy Long-term Blond Large Company Stock Small Company Stock 55% 12.7% 17.75 58 9.25 20.3% 1.19 US Goods with writy Sys Portfolio Usame with maturity ar 20 yrs Standard Scenes