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Your employer, a midsized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporarily heavy workloads. Your employer is also considering the purchase of Biggerstaff & McDonald (B&M), a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of $24 million, which is expected to grow at a constant rate of 5%. B&M’s financial state-ments report short-term investments of $100 million, debt of $200 million, and preferred stock of $50 million. B&M’s weighted average cost of capital (WACC) is 11%.

Answer the following questions:

a. Describe briefly the legal rights and privileges of common stockholders.

b. What is free cash flow (FCF)? What is the weighted average cost of capital? What is the free cash flow valuation model?

c. Use a pie chart to illustrate the sources that comprise a hypothetical company’s total value. Using another pie chart, show the claims on a company’s value. How is equity a residual claim?

d. Suppose the free cash flow at Time 1 is expected to grow at a constant rate of gL forever. If gL cash flows when discounted at the WACC? If the most recent free cash flow is expected to grow at a constant rate of gL , WACC), what is a formula for the present value of expected free cash flows when discounted at the WACC?

e. Use B&M’s data and the free cash flow valuation model to answer the following questions:

(1) What is its estimated value of operations?

(2) What is its estimated total corporate value? (This is the entity value.)

(3) What is its estimated intrinsic value of equity?

(4) What is its estimated intrinsic stock price per share?

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New-Project Analysis

Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax manufacturing costs by $110,000 annually. Madison would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $33,000 at the end of its 5-year operating life. The applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.42%. Working capital would increase by $35,000 initially, but it would be recovered at the end of the project's 5-year life. Madison's marginal tax rate is 40%, and a 10% WACC is appropriate for the project. Enter negative answers with minus sign

a. Assume management is unsure about the $110,000 cost savings - this figure could deviate by plus 20%. Calculate the NPV over the five-year period. Round your answer to the nearest dollar.

b.Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine's salvage value, and the working capital (WC) requirement. She asks you to use the following probabilities and values in the scenario analysis:

Calculate the project's expected NPV. Round your answer to the nearest dollar.

Calculate the project's standard deviation. Round your answer to the nearest dollar.

Calculate the project's coefficient of variation. Round your answer to two decimal places.

Cali Inc. wants to issue new 10-year bonds to fund its new investments. The company currently has 5 percent coupon bonds on the market that sell for $1,060. These bonds make semi-annual payments, and mature in 10 years. What coupon rate should the company set on its new bonds if it wants them to sell at par?What is the yield to maturityon the bonds?

BenT Shoes will open several new production facilities during the coming year. Each new production facility is designed to have one quality inspector. A concern is that during busy periods, the shipment of shoes to retailers may be delayed as they wait to be inspected. This concern prompted BenT Shoes to undertake a study of the flow of shoes into the quality inspection department as a waiting line. BenT Shoes vice president wants to determine whether one quality inspector per facility will be sufficient. The average delay waiting for quality inspection should be no more than one minute.

One random variable is the arrival times of shoes to the quality inspection department. For the quality inspection department being studied, the shoes interarrival times are assumed to be uniformly distributed between 2 and 9 minutes. Like the examples of your text-book, assume that the simulation run begins at time=0. Past data from similar quality inspection departments indicate that a normal probability distribution with a mean of 3 minutes and a standard deviation of 0.5 minutes can be used to describe service (inspection) times. Build the suitable simulation model, run it for 10 times, and decide if one inspector is enough.

Problem 11-01
Investment Outlay

Talbot Industries is considering launching a new product. The new manufacturing equipment will cost $18 million, and production and sales will require an initial $2 million investment in net operating working capital. The company's tax rate is 40%.

1. What is the initial investment outlay? Write out your answer completely. For example, 2 million should be entered as 2,000,000.
   $?
   
2. The company spent and expensed $150,000 on research related to the new project last year. Would this change your answer?
   -Select-Yes or No
   
3. Rather than build a new manufacturing facility, the company plans to install the equipment in a building it owns but is not now using. The building could be sold for $1.5 million after taxes and real estate commissions. How would this affect your answer?
   The project's cost will -Select- increase decrease or not change.

Your new client, Pool Chem, Inc., is looking to purchase new accounting software. Your client asks for your advice on the advantages and disadvantages of purchasing an "off the shelf" program vs. an internally developed program. Prepare a response to your client.

NEW PROJECT ANALYSIS You must analyze a potential new product—a caulking com- pound that Cory Materials’ R&D people developed for use in the residential construction industry. Cory’s marketing manager thinks the company can sell 115,000 tubes per year at a price of $3 25 each for 3 years, after which the product will be obsolete. The required equipment would cost $150,000, plus another $25,000 for shipping and installation. Current assets (receivables and inventories) would increase by $35,000, while current liabilities (accounts payable and accruals) would rise by $15,000. Variable cost per unit is $1 95, fixed costs (exclusive of depreciation) would be $70,000 per year, and fixed assets would be depreciated under MACRS with a 3-year life. (Refer to Appendix 12A for MACRS depre- ciation rates.) When production ceases after 3 years, the equipment should have a market value of $15,000. Cory’s tax rate is 40%, and it uses a 10% WACC for average-risk projects.

Spreadsheet assignment: at instructor’s option Construct a spreadsheet that calculates the cash flows, NPV, IRR, payback, and MIRR.

Problem 11-12
New-Project Analysis

Madison Manufacturing is considering a new machine that costs $350,000 and would reduce pre-tax manufacturing costs by $110,000 annually. Madison would use the 3-year MACRS method to depreciate the machine, and management thinks the machine would have a value of $33,000 at the end of its 5-year operating life. The applicable depreciation rates are 33.33%, 44.45%, 14.81%, and 7.41%. Working capital would increase by $35,000 initially, but it would be recovered at the end of the project's 5-year life. Madison's marginal tax rate is 40%, and a 10% cost of capital is appropriate for the project.

1. Calculate the project's NPV. Round your answer to the nearest dollar.
   $  
   Calculate the project's IRR. Round your answer to two decimal places.
        %
   Calculate the project's MIRR. Round your answer to two decimal places.
        %
   Calculate the project's payback. Round your answer to two decimal places.
        
2. 
   
3. 
   
4. 
   
5. Assume management is unsure about the $110,000 cost savings - this figure could deviate by as much as plus or minus 20%. Calculate the NPV if cost savings value deviate by plus 20%. Round your answer to the nearest dollar.
   $  
   Calculate the NPV if cost savings value deviate by minus 20%. Round your answer to the nearest dollar.
   $
6. 
   
7. 
   
8. 
   
9. Suppose the CFO wants you to do a scenario analysis with different values for the cost savings, the machine's salvage value, and the working capital (WC) requirement. She asks you to use the following probabilities and values in the scenario analysis:

   Scenario	Probability	Cost Savings	Salvage Value	WC
   Worst case	0.35	$  88,000	$28,000	$40,000
   Base case	0.35	110,000	33,000	35,000
   Best case	0.30	132,000	38,000	30,000

   
   Calculate the project's expected NPV. Round your answer to the nearest dollar.
   $  
   Calculate the project's standard deviation. Round your answer to the nearest dollar.
   $  
   Calculate the project's coefficient of variation. Round your answer to two decimal places.
        

Problem 18-01 Profit or Loss on New Stock Issue Security Brokers Inc. specializes in underwriting new issues by small firms. On a recent offering of Beedles Inc., the terms were as follows: Price to public: $5 per share Number of shares: 3 million Proceeds to Beedles: $14,000,000 The out-of-pocket expenses incurred by Security Brokers in the design and distribution of the issue were $240,000. What profit or loss would Security Brokers incur if the issue were sold to the public at the following average price? $5 per share? Use minus sign to enter loss, if any. $ $6 per share? Use minus sign to enter loss, if any. $ $3.5 per share? Use minus sign to enter loss, if any. $

1. An auto supplier installed new equipment costing $1,050,000. The equipment generated new income averaging $275,000 per year, and its operating costs averaged $50,000 per year. The equipment was depreciated using the MACRS method, assuming a 7-year recovery period and no salvage value. However, the equipment was kept in service for a total of 10 years, after which time a scrap dealer bought it for $75,000. The company has a combined effective federal and local tax rate of 26%, and uses an after-tax MARR rate of 8%. Determine the equipment’s after-tax net present worth over its 10-year service life.

[Answer: $302,000]