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FIN - You are Chief Financial Officer of the ABC Corporation




Question;You are Chief Financial Officer of the ABC Corporation. ABC;has two divisions, one of which distributes alcohol, while the other;manufactures bottles for brewers and beverage companies. The company is;considering a capacity expansion project in the alcohol distribution division;and the Board of Directors has asked you to provide a financial analysis of the;project.;? The project would require an initial investment of $100;million for a new distribution center. In addition, $20 million in additional;working capital would need to be committed to the project. The working capital;will be recovered at the end of the project life.;? The distribution center facilities would be depreciated on;a straight-line basis over five years. At the end of five years, you estimate;that the center will be sold for $20 million.;? The distribution center is expected to generate cash;revenues of $85 million per year and cash operating costs of $50 million per;year in each of the next five years.;? The corporate tax rate is 40%.;? The book value of ABC?s assets is $20 billion, while the;book value of its outstanding debt;is $5 billion. ABC?s equity has an estimated beta of 1.2.;? The expected return on the market portfolio is 15%, while;the risk-free rate of return is 5%.;? ABC could issue new debt at a yield to maturity of 8%.;? Companies that operate purely in the bottle manufacturing;industry have an average beta of 1.5 and an average debt-equity ratio (measured;at market value) of one quarter.;? Companies that operate purely in the alcohol distribution;industry have an average beta of 0.5 and an average debt-equity ratio (measured;at market value) of two-thirds.;Based on information above, you are to complete the project;analysis to present the Board meeting that is scheduled tomorrow.;a) Calculate the weighted average cost of capital.;b) Calculate the free cash flow of each year for the;expansion project.;c) What is the NPV for the project?


Paper#48934 | Written in 18-Jul-2015

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