Hi, I need help in solving case 2: Child Phy Company. please see the attached file and if you can solve it asap. It will be great help. If it can be done by Saturday night because i have deadline for Sunday.

PILON SCHOOL OF BUSINESS SHERIDAN COLLEGE Case Study FINA 23000 D - Finance Fundamentals NOTES: You are to do this assignment in the same groups of financial application assignment. You have to upload your final document(s) on SLATE (Dropbox) by the day of the Final Exam before 11.00 am. The group has to hand in a hard copy of the Word document, the day of the Final Exam in the beginning of the class. Overdue work would imply penalties and a zero mark could be given. The assignment represents 20% of the final grade. All the ratios and calculations should be done using Excel and the writing in Word. The tables from Excel should be copied and pasted into Word, however you are also to upload the \"rough\" Excel sheets as a separate file on Dropbox Expand your answers, you must demonstrate your understanding of the concepts. 1 CASE 1: ORBIT CORP (Total 25 marks) Problem 9, Chapter 11 The full problem instructions are given in the textbook (Page 385) Required a) Calculate Orbit's cost of capital (15 marks) b) Would you suggest that Orbit consider paying a small dividend? Justify your answer (5 marks) c) Explain how Orbit might improve its capital structure. Justify your position. (5 marks) CASE 2: Child Phy Company (Total 75 marks) The Child Phy Company was considering the advisability of adding a new product to its line. David Ben was in charge of new product development. Since the founding of the company in 1995, he had seen sales grow from $150,000 a year to almost $40 M in 2015. Although the firm had initially started out manufacturing toy trucks, it had diversified into such items as wall posters, child puzzles, stuffed animals, miniature trains, and board games. In 2009, it developed the third most popular board game for the year, based on a popular television quiz show, but the show was canceled two years later. Nevertheless, the firm learned its lesson well and continued to produce board games related not only to quiz shows but to situation comedies and even a popular detective series. However, by January of 2016, the need to generate new products was becoming evident. As can be seen in Figure 1, sales and net income were beginning to level off after the previously cited phenomenal growth. After doing a market analysis of possible products, Mr. Ben decided that the baseball card market was a good area for potential new sales. Baseball cards were a popular product not only among youngsters but also among adults who were trying to recapture the experience of their youth. A market survey by David Ben indicated that the Topps CW Company was the largest competitor in the industry. The company actually had a public distribution of its common stock in 2001. Other major sellers in 2016 were Upper Deck, Fleer, Leaf, and Donruss. All produce millions of baseball cards on an annual basis. The cards can be purchased in packs of 15-20 cards for $3.00-$8.00 at drug or convenience stores 1 or in boxes of 700800 cards for $40 and up. These larger quantities of cards were usually purchased from sport card specialty stores or at baseball card conventions (over 1,000 such conventions throughout the country took place a year). 1 Some packs are more expensive than others due to quality and buyer preference. 2 In doing his analysis, Mr. Ben discovered that the appeal of baseball cards was not only in opening a wrapper and finding a favorite player enclosed but also that any baseball cards initially purchased for pennies had gained substantially in value. Once a player achieved star status, his rookie card (first issued) might greatly increase in worth. Figure 1 Child Phy Company Year 1997 ....................................................... 1998 ....................................................... 1999 ....................................................... 2000 ....................................................... 2001 ....................................................... 2002 ....................................................... 2003 ....................................................... 2004 ....................................................... 2005 ....................................................... 2006 ....................................................... 2007 ....................................................... 2008 ....................................................... 2009 ....................................................... 2010 ....................................................... 2011 ....................................................... 2012 ....................................................... 2013 ....................................................... 2014 ....................................................... 2015 ....................................................... Sales $ 150,000 240,000 756,000 1,340,000 2,680,000 3,320,000 5,580,000 6,792,000 5,941,000 9,237,000 11,622,000 12,140,000 17,165,000 22,838,000 27,762,000 32,437,000 38,911,000 39,750,000 39,860,000 Net Income $ (16,000) (5,000) 72,000 91,000 175,000 198,000 248,000 387,000 291,000 439,000 566,000 621,000 850,000 1,221,000 1,437,000 1,628,000 1,762,000 2,002,000 1,950,000 For example, the 1968 rookie card of Nolan Ryan was selling for $2,000 in early 2015. The 1963 Pete Rose rookie card was valued at $500 and, finally, the first Topps card of Mickey Mantle issued in 1952 at 1 cent carried a trading value of $30,000 five decades later. While the card manufacturer did not directly participate in this price appreciation, the hope for such gains in the future keeps youngsters and adults continually active in buying cards as they come out. To convince management that the manufacturing and selling of baseball cards was a suitable activity for his firm, Mr. Ben had to make a thorough capital budgeting analysis for the executive committee of Child Phy Company. 2 The Analysis In evaluating the market potential, Mr. Ben determined that there was no way he could firmly predict the market penetration potential for a new set of baseball cards. The sales for the set, which would be called Baseball Stars, would depend on the quality of the final product as well as the effectiveness of the promotional activities. There is also the danger of a number of errors when a set is initially issued. With approximately 750 cards in the set, there is the possibility of misquoting batting averages, misspelling names, and so on. When Fleer and Donruss introduced their new sets in 1995, they were highly criticized by collectors for the numerous errors. Mr. Ben hoped to avoid this fate for the Baseball Stars set by making heavy expenditures on quality control. He also intended to hire a number of employees from other card companies so he would have experienced people who could identify potential problems at a very early stage. Over the years, Child Phy Company had developed a manual to evaluate capital budgeting projects. As a first step, David Ben was required to predict anticipated sales over the next six years. While he thought this was too short a time period to evaluate the full potential of the project, he knew he had no choice but to go along with company policy. He decided to project a range for potential sales in 2016 (the first new year of business) and assign probabilities to the outcomes. The information is shown in Figure 2. Figure 2 Projected first-year sales Assumption Sales Probability Pessimistic .......................................... Normal ................................................ Optimistic ............................................ Highly optimistic .................................. $1,100,000 2,000,000 3,750,000 4,500,000 0.35 0.30 0.25 0.10 1.00 It was his intention to determine the expected value for sales for the first year and then project a 20 percent growth rate for the next three years and 10 percent for the final two years. Operating expenses, which were expected to average 70 percent of sales, would then be subtracted to determine earnings before depreciation and taxes. The primary investment to be made was in printing and production equipment that is depreciated over 5 years. The equipment, which represents the investment for the project, costs $2.8 million. To determine earnings before depreciation and taxes (EBDT), subtract projected operating expenses from projected sales. The tax rate is 36 percent. Mr. Ben looked into the capital budgeting manual to determine the appropriate discount rate (as shown in Figure 3). The discount rate for the project is based on the coefficient of variation of the first year's sales. One of the accounting assistants informed him that the standard deviation of first year's sales was $1,526,000. He knew he could easily determine the expected value from the data previously presented (in Figure 2). 4 Mr. Ben thought that it was now time to call his assistants together to do the appropriate analysis. Figure 3 Discount rate determination Required Coefficient of Variation Discount Rate 0-.20 .21-.40 .41-.60 .61-.80 Over .80 8% 10 13 15 21 1. Determine the most suitable discount rate for Child Phy Company. (5 marks) 2. Calculate the expected cash flows of the project per period (30 marks) 3. Make a decision on whether the project is feasible, based on NPV analysis. (15 marks) 4. Make a decision on whether the project is feasible, based on IRR analysis (15 marks) 5. Is there any drawback of using a six-year time horizon for the project? (2 marks). Explain. (3 marks) 6. Suggest other method for this capital budgeting problem faced by Mr Ben. (5 marks) 5