Conch Republic Electronics

Conch Republic Electronics is a midsized electronics manufacturer located in Key West, Florida. The company president is Shelley Couts, who inherited the company. When it was founded over 70 years ago, the company originally repaired radios and other household appliances. Over the years, the company expanded into manufacturing and is now a reputable manufacturer of various electronic items. Jay McCanless, a recent MBA graduate, has been hired by the company’s finance department.

One of the major revenue-producing items manufactured by Conch Republic is a personal digital assistant (PDA). Conch Republic currently has one PDA model on the market, and sales have been excellent. The PDA is a unique item in that it comes in a variety of tropical colors and is preprogrammed to play Jimmy Buffett music. However, as with any electronic item, technology changes rapidly, and the current PDA has limited features in comparison with newer models. Conch Republic spent $750,000 to develop a prototype for a new PDA that has all the features of the existing PDA but adds new features such as cell phone capability. The company has spent a further $200,000 for a marketing study to determine the expected sales figures for the new PDA.

Conch Republic can manufacture the new PDA for $155 each in variable costs. Fixed costs for the operation are estimated to run $4.7 million per year. The estimated sales volume is 74,000, 95,000, 125,000, 105,000, and 80,000 per each year for the next five years, respectively. The unit price of the new PDA will be $360. The necessary equipment can be purchased for $21.5 million and will be depreciated on a seven-year MACRS schedule. It is believed the value of the equipment in five years will be $4.1 million.

As previously stated, Conch Republic currently manufactures a PDA. Production of the existing model is expected to be terminated in two years. If Conch Republic does not introduce the new PDA, sales will be 80,000 units and 60,000 units for the next two years, respectively. The price of the existing PDA is $290 per unit, with variable costs of $120 each and fixed costs of $1,800,000 per year. If Conch Republic does introduce the new PDA, sales of the existing PDA will fall by 15,000 units per year, and the price of the existing units will have to be lowered to $255 each. Net working capital for the PDAs will be 20 percent of sales and will occur with the timing of the cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will first occur in year 1 with the first year’s sales. Conch Republic has a 35 percent corporate tax rate and a 12 percent required return.

Shelly has asked Jay to prepare a report that answers the following questions.

Questions

1.            What is the payback period of the project?

2.            What is the profitability index of the project?

3.            What is the IRR of the project?

4.            What is the NPV of the project?

WRX Corp. has an equity beta of 1.20, a market value debt-to-equity ratio of 0.50, debt that is rated AAA, and a tax rate of 21%. Compute WRX Corp’s weighed average cost of capital (WACC) assuming that the current risk-free rate is 5%, the expected return on the market portfolio is 12%, and the current market price of 7.5% AAA bonds, with par values of $1000 maturing in 12 years is $1200. Assume that the bond makes annual coupon payments. Enter your answer as a percent; do not include the % sign. Round your final answer to two decimals.

Provide several criticisms of relative valuation. Which method of valuation do you think is more accurate, relative or discounted present value (DCF or intrinsic value) ? Why? How would rising risks or rising interest rates affect multiples? DCF? Be specific about how rising risks or interest rates influence multiplers? DCF? How important to valuation is classifying a firm into the correct industry? In what industry would you classify Amazon (past and future)?

If you were asked to graph or quantify the risk of owning IBM stock, how would you do it? What is your preferred measure of risk? How would you demonstrate that your metric captures risk adequately? Identify several S&P listed companies that you consider to be risky investments? How does rising global turmoil influence risk? The price of gold? The price of U.S. Treasury bonds? U.S. equities? Which is a riskier asset, a 3-month U.S. Treasury bond or a 10-year U.S. Treasury bond? Explain. What factors could push the yield on 6-month U.S. Treasury higher than the 10-year U.S. Treasury bond.

You are the financial manager of a multinational corporation and you are contemplating new investments in production facilities in China. What are the risks and/or concerns of investing in production facilities in China amidst the US-China trade war that began early in 2018?

1. In the context of the “international debt crisis”, why were MNCs, international banks and national governments of less developed countries eager to utilize debt-for-equity swaps?

GM, Ford, and Tesla are automobile companies. Or are they? Explain how valuing Tesla and Ford may differ from valuing GM? Which stock is the most expensive? How did you determine which company was the most expensive? Do you think intangible assets are a larger share of total company assets today than 3-4 decades ago? How has this change made the valuation of business more difficult or easier? How could or would you measure intangible assets of a publicly listed firm? What type of companies have a large share of their assets tied up in intangibles (e.g. manufacturing, retailers, etc.). Explain why this is likely the case.

Rounding in the calculation of monthly interest rates is discouraged. Such rounding can lead to answers different from those presented here. For long-term loans, the differences may be pronounced. Assume that you take out a $2000 loan for 30 months at 9.5% APR. What is the monthly payment? What is the first month interest?

1. A firm is solely financed by equity with market value of $50,000 and cost of equity of 10%. It wishes to raise another $50,000 via corporate bonds with cost of debt of 5% and keep it as cash. Hold investment policies fixed.
   1. In a MM world without taxes,
      1. What would the firm value be after debt issuance in a? Firm Value = Equity Value + Debt Value – Cash.
      2. What would be the cost of equity after debt is raised?
      3. What would be the WACC after debt is raised?
   2. In a MM world with taxes of 40%,
      1. What would be the cost of equity after debt is raised?
      2. What would be the additional value created by debt?
      3. What would be the WACC after debt is raised?

1. Lawson is a U.K- based wine and spirits company. It seeks to create a fine wine division to enhance its portfolio of global properties. The CFO is scrutinizing a proposal to make an investment in a vineyard in Chile. It requires the purchase of 20 acres of vineyards in the Maipo valley and setting up the requisite infrastructure for processing grapes and bottling wine. The project is expected to last five years, after which an exit through its sale to a local affiliate is assumed. The following table lists the cash flows denominated in the Chilean peso (CLP). Assume spot GBPCLP = 600

a. The appropriate CLP discount rate for projects of this nature is 15 percent. What is project NPV in CLP?

   b. Assume that GBPCLP remains constant at 600. Convert project cash flows into GBP (pounds). Using Lawson’s GBP WACC of 10 percent, calculate the project NPV in GBP.

Please show work and formulas used. Than You!

XCo has 400 shares outstanding. It earns $1,000 per year and will use all $1,000 to repurchase its shares in the open market rather than pay dividends, required return = 10%. how many shares will be outstanding at the end of year 1, after the first share repurchase.

A) 393.9

B) 383.8

C) 373.7

D) 363.6

E) 353.5

Over the years we have seen large changes in US federal income tax rates, with the highest marginal rates falling from 70% to under 40% today. Describe the impact of this change on the spread between US Treasury bonds and municipal bonds.

You are considering making a movie. The movie is expected to cost $10.3 million up front and take a year to produce. After​ that, it is expected to make $4.6 million in the year it is released and $1.9 million for the following four years. What is the payback period of this​ investment? If you require a payback period of two​ years, will you make the​ movie? Does the movie have positive NPV if the cost of capital is 10.9%​?

The company provides a reconciliation of the $5.66 EPS figures to the income statement’s reported EPS figure of $8.78. Also referred to as “Core EPS” in a PepsiCo-related press release, this figure, $5.66, is a non-GAAP financial measure many companies choose to report. What does a non-GAAP financial measure mean? What does the terminology “core” suggest to you? What is the reason that many companies provide non-GAAP financial information in their financial reports?