Could you help me answer the question? Thank you very much!

A local company, Looking Good Limited, has been selling a rejuvenating face cream for the last 12 months. Although the face cream performed well in the laboratory tests conducted on rabbits, there has been an unfortunate side effect when the cream is used on people over 40. The company has received a few positive comments from satisfied male customers, but the number of complaints from women has been increasing. The pharmacist responsible for developing the product conducted further tests (this time on frogs) and found that the cream greatly increased facial hair.

Question 1:

The local law firm has always handled legal matters for Looking Good. They have advised the company that a class action taken to court by Looking Good's customers would be guaranteed to succeed. The lawyers estimate the court case would take one year to complete and that the judge would award $5000 per plaintiff. Louise Bloom, the managing director of Looking Good tells you that 10000 customers have been unhappy with the side effects produced by the cream.

The management team at Looking Good has identified several ways of dealing with the situation:

1. Purchase bonds that return 4% pa to create 'damages reserve'. Louise Bloom wants you to tell her the dollar amount of a bond purchase made today that would provide sufficient funds to pay damages when the court case is settled. Coupons and face value would be used to settle the claims.

2. Settle out of court. Louise Bloom wants you to tell her how much the company could offer the plaintiffs today and be indifferent to waiting for the court case to be settled.

3. Get a big city lawyer. Louise Bloom has a cousin with a legal contact who estimates that the case could be delayed for a further year. This approach in unlikely to change the outcome, but will mean that Looking Good does not have to pay damages until 2 years from now. Looking Good's cost of capital is 10%. Louise Bloom wants to know the maximum amount of money she would pay for the lawyer to use delaying tactics.

Required

a Using TVM principles, determine which of the alternatives would you recommend if you were told the objective of the firm was to minimise the costs to shareholders?

b Are there any ethical issues that might cause you to modify your conclusion? Why might ignoring such an issue have a negative effect on shareholder wealth?

Question 2:

Looking good is seeking to diversify and is evaluating several development projects for new cosmetics in light of recent legal matters. Although the cash flows are difficult to forecast, the company has come up with the following estimates of the initial capital requirements and NPVs for the projects. Given a wide variety of staffing needs, the company has also estimated the number of

research scientists required for each development project. (All cost values are given in millions of dollars.)

a. Suppose that Looking Good has a total budget of $60 million. How should it prioritise these projects?

b. Suppose that Looking Good currently has 12 research scientists and does not anticipate being able to hire any more in the near future. How should Looking Good prioritise these projects?

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