AmazDeal is an integrated company. The following information is taken from its income statements for 2009 and 2010 (all dollar figures are in millions):

2009

Sales: $240,000; cost of goods sold: 54% of sales, depreciation: $16,000, CAPEX: $6,000, additional investment in net working capital: $1,200

2010

Sales: $267,000, cost of goods sold: 55% of sales, depreciation: $17,200, CAPEX: $6,750, additional investment in net working capital: $1,350

Applicable tax rate for the company is 35%.

Calculate companys free cash flows (FCF) for 2009 and 2010

Estimate companys FCF for 2011-2015 using the following assumptions:

Companys sales will grow at 4% per year over the next five years;

Cost of goods sold as a percentage of sales is expected to increase by 1% each year, i.e., the gross margin ratio will be decreasing by 1% every year;

Total CAPEX each year is expected to be equal to 25% of additional sales that year (compared to the previous year);

Increase in net working capital in a given year will be equal to 5% of additional sales that year (compared to the previous year);

Total depreciation each year will be equal to the total depreciation in a prior year plus 20 % of CAPEX incurred in a prior year (for example, depreciation in 2010 was 16,000 + 20% x 6,000 = 17,200). Since the company is a going concern we need not be concerned about the liquidation value of the firms assets at the end of 2015.

2. A company considers purchasing a high-capacity industrial 3-D printer. The management anticipate that the new machine will lead to more economic use of raw materials, reduced labor costs, and increased sales. The firm estimates that the installation of the machine will save $40,000 on raw materials and $50,000 on reduced labor costs and will increase sales by $60,000 (all estimates are per year).

The proposed machine costs $500,000 and it will have a five year anticipated life and will be depreciated using MACRS depreciation method toward a zero salvage value (MACRS depreciation rates are given below). However, the company will be able to sell the machine in the after-market for 20% of its original costs at the end of year 5. The company requires a 11% rate of return from its investment and faces a 35% tax rate (the company is profitable).

Calculate the NPV and IRR for the project. Should the company invest in this machine?

The manager raised some concerns about increased revenues. She projects that the increased revenues could be 10% to 50% less than what was projected. However, the savings from reduced labor costs and reduced raw material costs would remain same. She presented the probability distribution on the projected sales (see the table below).

Estimate the NPV and IRR for each of these scenarios.

Estimate the expected NPV, which is equal the weighted average sum of NPVs under each scenario weighted (multiplied) by the probability of a given scenario. Should the company invest in the machine under this revised analysis?

At what increased sales volume, the company would have a break-even (NPV=0)?

3. Insco Inc. has the balance sheet as shown below.

Recently the yield on bonds similar to the ones that company has had fallen to 4.5%, so that the market value of the bonds is now about $707 million

The rate on company' short-term notes is equal the market's rate on these notes, which is 5%.

What are the company's total invested capital and capital structure weights?

What is the company's cost of equity according to CAPM, if the U.S. T-bond yield is 2.00 %, the long-term market risk premium is 6% and the company's levered beta is 1.5?

What is the company's WACC?

What would be the beta of a similar company that has no debt? You will need to estimate beta of bonds and short term debt using CAPM first

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