10-year marketing campaign whereby the credit terms to customers will be relaxed together with other marketing strategies. This campaign would result in a (forecasted) increase in sales of 3,000 units per year and a cash expense of $50,000 per year. 

The new warehouse facility would cost $600,000. It will have ten-year usable life and would be depreciated over its life using the straight-line depreciation method (assume no salvage value).

Total variable costs are estimated at $200 per unit, which includes material and labour costs. The unit selling price of the product is $260. 

As per the above forecasts and assume they remain the same every year, the 10-year marketing campaign and cost-saving due to the acquisition of the new facility would generate free cash flows of $109,000 per year.

HCL has a 30% tax rate and the company's liabilities amount to 60% of the total asset. 

(i) Treasury bonds with $1,000 face value, 10 years to maturity, annual coupons of $50, and yield to maturity of 3% per year, which currently trading at the price of $1100 per unit, and (ii) Ordinary shares of company XYZ, which just paid a dividend of $0.50 per share, with dividend growth prospects of 4% per year and required rate of return of 8%. The share is currently trading at a price of $14.

Wanting to know from the case study above:

1) Expected cash flow of 10 year?

2) Net present value (NPV)

3) Internal rate of return (IRR)

4) payback period

5) cost of equity

6) cost of debt

7) WACC

8) weight on equity

9) weight on debt

10) instrinsic value of the tresury

Answer rating: 100% (QA)

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