Review the Cost of Capital and Project Risk Mini-Case (pg. 343). Smart Pam Roberts, former Executive Director

Review the "Cost of Capital and Project Risk" Mini-Case (pg. 343). 

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Smart Pam Roberts, former Executive Director of Corporate Services, Cummins Inc. "We recognize that we can't predict each parameter with great accuracy." Andy Bryant, Executive Vice President and Chief Administrative Officer, Intel Corp. "Opcion theory was always used to show why we should do something I never saw an analysis that said why we should not do something." SMART concepts See the continuation of the NPV analysis with scenario analysis of the decision to open a laser eye surgery center. ng cash flows in year 3) of $500,000. CWC has a 34% orate For the purposes of this project, working capital eds will be ignored. Bottled water targeted at children perted to have different risk characteristics from the cument products. Therefore, CWC has decided to the "pure play" approach to evaluate this project. After SMART solutions See the solution to Problem 10-3. Mini-Case Cost of Capital and Project Risk Ccade Water Company (CWC) currently has 30,000,000 as of common stock outstanding that trade at a price S42 per share. CWC also has 500.000 bonds outstand- ng that currently trade at $923.38 each, CWC has no pre- leed stock outstanding and has an equity beta of 2.639. The skree rate is 3.5%, and the market is expected to um 1252%. The firm's bonds have a 20-year life. a $1,000 prvue a 10% coupon rate, and pay interest semiannually. CWC is considering adding to its product mix a healthy comed water geared toward children. The initial outlay for The project is expected to be $3,000,000, which will be de- precated using the straight-line method to a zero salvage 2. 3. and sales are expected to be 1,250,000 units per year at a price of $1.25 per unit. Vanable costs are estimated to 1024 per unit, and fixed costs of the project are esti- ed at $200.000 per year. The project is expected to the 2 y de and a terminal (excluding the op- researching the market, CWC managed to find two pure- play firms. The specifics for those two firms are: Equity Beta 1.72 1.84 Firm Fruity Water Ladybug Drinks DVE 043 0.35 Tax Rate 34% 36% Assignment 1. Determine the current weighted average cost of capital for CWC Determine the appropriate discount rate for the healthy bottled water project. Should the firm undertake the healthy bottled water project? As part of your analysis, include a sensitivity analysis for sales price, variable costs, fixed costs, and unit sales at ±10%, 20%, and 30% from the base case. Also perform an analysis of the following two scenarios: a Best case Selling 2,500,000 units at a price of $1.24 per unit, with variable production costs of $0.22 per unit b. Worst case Selling 950,000 units at a price of $1.32 per unit, with variable production costs of $0.27 per unit Smart Pam Roberts, former Executive Director of Corporate Services, Cummins Inc. "We recognize that we can't predict each parameter with great accuracy." Andy Bryant, Executive Vice President and Chief Administrative Officer, Intel Corp. "Opcion theory was always used to show why we should do something I never saw an analysis that said why we should not do something." SMART concepts See the continuation of the NPV analysis with scenario analysis of the decision to open a laser eye surgery center. ng cash flows in year 3) of $500,000. CWC has a 34% orate For the purposes of this project, working capital eds will be ignored. Bottled water targeted at children perted to have different risk characteristics from the cument products. Therefore, CWC has decided to the "pure play" approach to evaluate this project. After SMART solutions See the solution to Problem 10-3. Mini-Case Cost of Capital and Project Risk Ccade Water Company (CWC) currently has 30,000,000 as of common stock outstanding that trade at a price S42 per share. CWC also has 500.000 bonds outstand- ng that currently trade at $923.38 each, CWC has no pre- leed stock outstanding and has an equity beta of 2.639. The skree rate is 3.5%, and the market is expected to um 1252%. The firm's bonds have a 20-year life. a $1,000 prvue a 10% coupon rate, and pay interest semiannually. CWC is considering adding to its product mix a healthy comed water geared toward children. The initial outlay for The project is expected to be $3,000,000, which will be de- precated using the straight-line method to a zero salvage 2. 3. and sales are expected to be 1,250,000 units per year at a price of $1.25 per unit. Vanable costs are estimated to 1024 per unit, and fixed costs of the project are esti- ed at $200.000 per year. The project is expected to the 2 y de and a terminal (excluding the op- researching the market, CWC managed to find two pure- play firms. The specifics for those two firms are: Equity Beta 1.72 1.84 Firm Fruity Water Ladybug Drinks DVE 043 0.35 Tax Rate 34% 36% Assignment 1. Determine the current weighted average cost of capital for CWC Determine the appropriate discount rate for the healthy bottled water project. Should the firm undertake the healthy bottled water project? As part of your analysis, include a sensitivity analysis for sales price, variable costs, fixed costs, and unit sales at ±10%, 20%, and 30% from the base case. Also perform an analysis of the following two scenarios: a Best case Selling 2,500,000 units at a price of $1.24 per unit, with variable production costs of $0.22 per unit b. Worst case Selling 950,000 units at a price of $1.32 per unit, with variable production costs of $0.27 per unit

Answer rating: 100% (QA)

1 To determine the current weighted average cost of capital WACC for CWC we need to calculate the cost of equity and the cost of debt and then weight them based on the firms capital structure Cost of ... View the full answer