Introduction
to Corporate Finance - Assignment
Case
Cascade
Water Company (CWC) currently has 30,000,000 shares of ordinary shares
outstanding that trade at a price of $42 per share.
CWC
also has 5,000,000 bonds outstanding that currently trade at $92.34 each.
CWC
has no preferred shares outstanding and has an equity beta of 2.639. The
risk-free rate is 3.5%, and the market is expected to return 12.52%. the
company’s bonds have a 20-year life, a $100 face value, a 10% coupon rate and
pay interest semi-annually.
CWC
is considering adding to its product mix a healthy bottled water geared toward
children.
The
initial outlay for the project is expected to be $3,000,000, which will be
depreciated using the straight-line method to a zero salvage value.
Sales
are expected to be 1,250,000 units per year at a price of $1.25 per unit.
Variable
costs are estimated to be $0.24 per unit, and fixed costs of the project are
estimated at $200,000 per year.
The
project is expected to have a three-year life and a terminal value (excluding
the operating cash flows in year 3) of $500,000.
CWC
has a 34% tax rate. (For the purposes of this project, working capital effects
will be ignored).
Bottled
water targeted at children is expected to have different risk characteristics
from the company’s current products.
You
have recently graduated with a degree in finance. Your employer, CWC wants you
to work with the provided to data to address the given problems
a.
Determine
the weighted average cost of capital for CWC.
b. Should
CWC go ahead with its proposed project of bottled water under the normal
conditions as stated previously?
c. Should
CWC go ahead with its proposed project of bottled water under the following
best case and worst case scenarios?
•
Best – Case Scenario
Selling
2,500,000 units at a price of $1.24 per unit, with variable production costs of
$0.22 per unit.
•
Worst – Case Scenario
Selling
950,000 units at a price of $1.32 per unit, with variable production costs of
$0.27 per unit.
d. What
would you do as the financial analyst? Which investment would you recommend,
and why?