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1). As the newly appointed financial manager of HOMEWORK co., you are about to a

by | Sep 30, 2021 | Finance | 0 comments

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1). As the newly appointed financial manager of HOMEWORK co., you are about to analyze a project. Here is the data you have collected. The project requires an investment of $180,000 today. The forecasted cash flows from the project are listed below. All the entries are nominal. To calculate tax liability, you assume that for tax purposes the company uses straight-line depreciation during the economic life the project and the salvage value is zero. However, there is a salvage value of $10,000 in year 4. The tax rate is 21%. The opportunity cost of capital is 18%. Year: 0 1 2 3 4 Revenues 273,000 322,887 342,610 Cost of goods sold 100,000 143,729 159,552 Increase in inventory Increase in accounts payable Increase in accounts receivable 20,000 8,000 10,000 5,000 4,000 5,000 -10,000 -6,000-5,000 -15,000 -6,000-10,000 Please fill in the blanks below. If the answer is blank, put “0” in the cell. Don’t add “$” or “,” or “.” in your answers. All the answers are in $1 unit. No decimals. [42 points] Year 0 1 2 3 4 Panel A Capital Investment Cash flow from capital investment [] [] [] [] [] Panel B Operating Cash Flow Operating cash flow [] [] [] [] [] Panel C Investment in Working Capital Cash flow from investment in working capital [] [] [] [] [] Panel D Project Valuation Discounted cash flows [] [] [] [] [] NPV [] 2). The financial manager of HW is considering a project. It will produce just one cash flow in year 1, but with some uncertainty. It has 10% of chance to generate $8 million in year 1, 60% of chance to generate $3 million, and 30% to generate $0. The project requires $2.5 million investment today. The project has the average risk level of the company. You also have some information on the company. HW’s cost of debt is 4.5%. Beta of debt is 0.2. The average estimate for the beta of HW’s industry is 1.5 with standard error of 0.3. The ratio of debt to overall company value is 20%. Assume market return based on historical data is 9%, risk free rate is 0.5% and corporate tax rate is 21%. (a). What’s cost of equity for company HW by using CAPM model?(keep four decimals) [12 points] (b). What’s the after-tax WACC of HW? (keep four decimals) [18 points] (c). What’s NPV of the project based on your answer in (a) and (b)? (keep four decimals) [24 points] (d). Should the financial manager take the project and why? [4 points]

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