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4) Compute Weighted Average Cost of Capital (WACC) (35 points)

- Estimate the firms before-tax and after-tax component cost of debt; (Note: If the information about the current corporate tax rate is not available, you need to estimate the tax rate based on the historical tax payments).

- Estimate the firms component cost of preferred stock;

- Use three approaches (CAPM, DCF, bond-yield-plus-risk-premium) to estimate the component cost of common equity for the firm.

- Calculate the firms weighted average cost of capital (WACC) using the market-based capital weights.

(5) Cash Flow Estimation (40 points)

- We assume that the company you selected is considering a new project. The project has 11 years life. This project requires initial investment of $680 million to purchase equipment, and $30 million for shipping & installation fee. The fixed assets fall in the 10-year MACRS class. The salvage value of the fixed assets is 7.5% of the purchase price (including the shipping & installation fee). The number of units of the new product expected to be sold in the first year is 2,500,000 and the expected annual growth rate is 8.5%. The sales price is $260 per unit and the variable cost is $205 per unit in the first year, but they should be adjusted accordingly based on the estimated annualized inflation rate of 2.5%. The required net operating working capital (NOWC) is 10% of sales. Use the corporate tax rate obtained in Step (4) for the project. The project is assumed to have the same risk as the corporation, so you should use the WACC you obtained from prior steps as the discount rate. Note: you may revise the partial model in the file Ch11 P18 Build a Model.xls on the website of the textbook (also posted in this final project learning module in Blackboard) for capital budgeting analysis, but you are NOT required to strictly follow the partial model. Actually, you are encouraged to build a better model by yourself.

- Compute the depreciation basis and annual depreciation of the new project. (You can refer to Table 11A-2 MACRS allowances on P.500 in the textbook)

- Estimate annual cash flows for 11 years.

- Draw a time line of the cash flows.

(6) Capital Budgeting Analysis (40 points)

- Using the WACC obtained from in Step (4) as the discount rate for this project, apply capital budgeting analysis techniques (NPV, IRR, MIRR, PI, Payback, Discounted Payback) to analyze the new project.

- Perform a sensitivity analysis for the effects of key variables (e.g., sales growth rate, cost of capital, unit costs, sales price) on the estimated NPV or IRR in order to demonstrate the sensitivity of the model. The Scenario analysis of several variables simultaneously is encouraged (but not required). A PDF document named Sensitivity Analysis in Excel is provided in this learning module. The article introduces the Data Table method that you can use for performing sensitivity analysis in Excel.

- Discuss whether the project should be taken and summarize your report.

3. Other information regarding the project:

(1) Choose a publicly-traded high-tech company. Your team needs to inform the instructor of the company that you intend to analyze. Different team should use different companies for their projects. If two teams happen to select the same company, the group that informed the instructor first will have the priority, and the other group need to pick another company.