Overview
Your friend Hagrid is thinking about opening a new restaurant, the Hungry Hagrid, and he asked you to do a financial analysis of the project. As you’re putting your 5-year projections together, you estimate the following: • The cost of project will be $2,500,000 immediately. Your accountant tells you that IRS rules mandate that this must be depreciated over a 7-year period, using the following accelerated annual depreciation schedule: 28%, 20%, 17%, 12%, 10%, 8%, and 5%. • Annual sales estimates from Hagrid are in your spreadsheet. • COGS will be 25% of sales. • NWC will be $150,000 immediately (year zero), and NWC will be 18% of sales in years 1 to 5 (assume NWC investments will be recovered at the end of the project). • Salvage value of $750,000 at the end. • Tax rate of 22%. • The appropriate discount rate is 12.5%. Using your assumptions, find the NPV of the restaurant venture. What is your recommendation to Hagrid?
Question 2 (60 points) You want to estimate the WACC for Acromantula Corporation. They have 1,250,000 shares of common stock outstanding, which paid a $2.50 dividend per share last year (you expect this to grow by 4% annually). The firm has a beta of 1.4, the risk-free rate is 1.2% and the expected market return is 9%. They have no preferred stock. They have $22,000,000 (face value) in debt, with 21 years to maturity, a 7% semiannual coupon, and a current price quote of $1011.29 (per $1000 of face value). Their tax rate is 28%. What is their WACC?
Question 3 (50 points) You are working on an estimated NPV for a movie project. It will cost $75 million to produce the first movie, and there is a 25% chance it is a success (producing a CF of $185 million in a year), and a 75% chance it is not successful (with a CF of $45 million). If the first movie is a success, then you’ll fund a big budget sequel. It’ll cost $280 million, and has a 95% chance of generating a $950 million cash flow in 2 years, and a 5% chance of a $210 million cash flow. If the first movie is not a success, you’re planning to do a low-budget sequel. In this case, the sequel will cost $35 million, and has a 80% chance of a $50 million cash flow, and a 20% chance of a $25 million cash flow. Your discount rate is 17% for this movie. ATTACHED IS THE EXCEL PLEASE INSERT THE NUMBERS FOR THE 3 QUESTIONS IN EXCEL!!