Q1 You are the CFO of Floor Tile Incorporated. There are two investment options your management team has asked you to get

profileFin-Acc-Boss
 (Not rated)
 (Not rated)
Chat
Home>Homework Answsers>Business & Finance homework help
             
Q1You are the CFO of Floor Tile Incorporated.  There are two investment options your management team has asked you to get 
 Board approval on.  The first is a new manufacturing plant in Indiana to service the local construction industry.  The second 
 is a new product-line expansion for environmentally conscious consumers when they build or remodel their home.  Below are 
 the cash flow estimates for both projects along with some notes on each.      
             
             
 New Plant          
 The new plant will cost $15 million to build.  The plant will lose money the first year as it ramps up which can be seen below   
 in the cash flow estimates.  The company management estimates that the plant will continue to produce product for years to   
 come and have indicated that the earning potential of the plant will be worth $10 million at the end of year five.  Please take   
 this into consideration when you consider the value of the plant.  Floor Tile Inc. has a weighted Average Cost of Capital of   
 11%.  The CFO believes this investment is consistent with the company's existing business model and has the same risk   
 profile.           
  New Plant in Indiana        
  (dollars in millions)         
   Year 1Year 2Year 3 Year 4Year 5     
  Free Cash Flow($1.0)$3.0 $4.0 $5.5 $17.0      
             
             
 New Product Line          
 The new product line will cost $25 million up front to launch.  The $25 million will include the price of a new plant for   
 manufacturing as well as the equipment.  Because this new environmentally friendly tile is much more expensive the   
 company feels they will need a new sales force and it will take a few years before the product is cash flow positive due to   
 the ramp up of sales.  It is a different customer base and the CFO believes consumers will turn back to lower cost product at   
 the expense of the environment so he is certain it is more risky than the company's traditional business.  He has used data   
 from companies with environmentally focused products to determine this project's Weighted Average Cost of Capital is   
 13%.   It too will have a terminal value and the management team  estimates that at the end of 5 years the new product line    
 will be worth $22 million.         
             
  New Environmentally Friendly Tile       
  (dollars in millions)         
   Year 1Year 2Year 3 Year 4Year 5     
  Free Cash Flow($3.0)($1.0)$5.0 $8.0 $36.0      
             
             
 Should the CFO propose both projects to the board.  Why or why not?  How did you determine this?  Show your work. 
             
(10)Project 1           
             
             
             
             
             
             
             
             
             
             
             
             
(10)Project 2           
             
             
             
             
             
             
             
             
             
(5)What discount rate did you use for the New Product line?  Why?       
             
             
             
             
(5)If the CFO chose to use the companies Cost of Capital to assess the new product line would he have made a different decision 
 about proposing the project?         
             
             
             
             
             
             
             
             
             
             
Q2The current 10 year government bond is trading at 2.0%.  The beta of the market is 1.0.  The long term equity risk premium is 7%.
             
             
(5)Draw the Security Market Line (SML).  Label both Axes.       
             
(10)Now show where a stock would fall on that line if it had a beta of 1.4?  What would its expected return be?  
             
             
             
             
             
             
             
             
    SML        
             
             
             
             
             
             
             
             
             
             
             
             
             
             
Q3You are trying to decide what the WACC of a Company in the mining industry should be.  You have determined  
(15)from its peer companies that the unlevered beta for the industry is 1.25.  The 10 year government bond is trading  
 at 2.0%. The Company's debt currently has an interest rate of 7.0% and is trading at par.  The Company's tax rate  
 is 37%.  The equity risk premium is 7%.  The Company currently has a market value of $700 million.  It has $114.5`  
 million in net debt outstanding (see statements below).  This is the capital structure the company expects to have  
 well into the future. What is the Company's cost of capital?      
             
             
             
             
             
             
             
             
Q4Use the data from Question 3 plus the data below.       
             
             
(10)What is the Company's 2010 EBITDA Multiple?         
             
             
             
             
             
             
             
(10)What is the Company's 2010 P/E multiple?        
             
             
             
             
             
             
(10)What is the Company's Return on Capital?        
             
             
             
             
             
             
             
(10)What is the Company's 2010 DSO?        
             
    days        
             
 Mining Co. Inc. - Income Statement 20092010     
             
 Revenue    $460.0$700.0     
 Cost of Goods Sols   165.6 238.0      
 Gross Profit   294.4 462.0      
 Sell., Gen. and Admin. Exp.  207.0 301.7      
 Operating Income   $87.4$160.3     
             
 Interest Expense   2.0 6.0      
 Pre-Tax Income   85.4 154.3      
 Taxes    29.9 54.0      
 Net Income   $55.5$100.3     
             
 Balance Sheet   20092010     
             
 Cash    $75.0 $35.5      
 Accounts Receivable   92.0 210.0      
 Inventory    69.0 126.0      
 Total Current Assets   $236.0 $371.5      
             
 Property Plant and Equipment  184.0 280.0      
 Total Assets   $420.0 $651.5      
             
 Accounts Payable   59.8 91.0      
 Total Current Liabilities  $59.8 $91.0      
             
 Debt    50.0 150.0      
 Total Liabilities   $109.8 $241.0      
             
 Shareholders' Equity   310.2 410.5      
 Total Liabilities & Shareholders' Equity $420.0 $651.5      
             
 Statement of Cash Flow  20092010     
             
 Cash Flow from Operation         
 Net Income   $55.5$100.3     
 Change in Working Capital   (143.8)     
 Depreciation    26.3      
 Free Cash Flow from Operations  ($17.2)     
             
 Cash Flow from Investing         
 Additions to Property Plant and Equipment  (122.3)     
 Free Cash Flow from Investing   ($122.3)     
             
 Cash Flow from Financing         
 Issuance/(Paydown) of Debt   100.0      
 Issuance/(Repurchase) of Equity   0.0      
 Cash Flow from Financing Activities  $100.0      
             
 Cash Flow Generated/(Used) During the Year ($39.5)     
             
 Beginning of Year Cash   75.0      
 End of Year Cash    35.5      
             

 

    • 10 years ago
    Report issue
    Q1 You are the CFO of Floor Tile Incorporated. There are two investment options your management team has asked you to get
    NOT RATED

    Purchase the answer to view it

    blurred-text
    • attachment
      quiz_answer.xlsx