You have recently been hired at ABC Company as a financial analyst. Congratulations! As you begin your new role, the CFO has selected you for an important project with two key parts. Part 1 Financial Statement Analysis The financial statements for the past three years are included. For the first part of your project, you need to thoroughly analyze these statements. You should create common size statements and compute key ratios. Summarize your findings in a report back to the CFO.

Part 2 Project Analysis ABC Company is considering adding a new line to its product mix and you have been asked to complete the capital budgeting. The production line would be set up in unused space in the main plant. The machinerys invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. The machinery has an economic life of 4 years, and ABC Company has obtained a special tax ruling that places the equipment in the MACRS 3-year class. The machinery is expected to have a salvage value of $25,000 after 4 years of use. The new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. Each unit can be sold for $200 in the first year. The sales price and cost are both expected to increase by 3% per year due to inflation. Further, to handle the new line, the firms net working capital would have to increase by an amount equal to 12% of sales revenues. The CFO has provided you with the following data, which she believes may be relevant to your task: The firms tax rate is 40%. The current price of ABCs 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Jana does not use short-term interest-bearing debt on a permanent basis. The current price of the firms 10%, $100 par value, annual dividend, perpetual preferred stock is $116.95. ABCs common stock is currently selling at $50 per share. The stock beta is 1.2, the yield on T-bonds is 2.6% (this is the risk-free rate), and the market risk premium is estimated to be 7%. ABCs target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. You should determine the firms WACC and analyze this project to help determine whether ABC Company should proceed. Summarize your findings in a report back to the CFO. Be sure to justify your recommendations with solid analysis.

Balance Sheets 2018 2016 2017 Assets 9,000 48,600 14,000 71,632 Cash 7,282 Short-term investments 20,000 Accounts receivable 351,200 878,000 632,160 1,287,360 1,946,802 Inventories 715,200 $ 1,124,000 1,716,480 2,680,112 Total current assets Gross fixed assets 1,202,950 491,000 1,220,000 263,160 939,790 $2,886,592 Less: Accumulated depreciation Net fixed assets 146,200 383,160 836,840 3,516,952 344,800 $1,468,800 Total assets Liabilities and Equity Accounts payable Notes payable 2016 2017 2018 $ 145,600 200,000 324,000 359,800 720,000 300,000 Accruals 136,000 $ 284,960 380,000 $ 1,328,960 $ 1,039,800 Total current liabilities 481,600 Long-term debt 323,432 1,000,000 500,000 Common stock 460,000 1,680,936 460,000 Retained earnings 203,768 97,632 296,216 $1,977,152 $ 3,516,952 Total equity Total liabilities and equity $ 663,768 $ 1,468,800 557,632 2,886,592 Income Statements 2016 2017 2018 $ 7,035,600 Sales 3,432,000 5,834,400 Cost of goods sold Depreciation and amortization Other expenses Total operating costs 2,864,000 4,980,000 5,800,000 18,900 340,000 120,000 116,960 720,000 $ 5,816,960 $ 612,960 $6,532,960 $ $3,222,900 $ 209,100 17,440 502,640 EBIT Interest expense 62,500 $ 176,000 |(158,560) (63,424) (95,136) 80,000 422,640 Taxable income 146,600 58,640 87,960 Taxes 169,056 253,584 Net income