McArnolds Finance Assingment Help With Solution
TCBC, a regional cable TV provider, is considering expanding into the home security business. TCBC estimates that the cash inflows for the home security project will be $15M in year 1, $20M in year 2, and $25M in year 3. After year 3, the cashflows are expected to
increase by 4% per year for the foreseeable future.
TCBC has identified Alcatraz Systems, Inc. (ASI), a company that operates in a similar home security market. ASI’s beta is 1.25. ASI has a C bond rating, a cost of debt of 14%, and a marginal tax rate of 35%. The risk-free rate is 6% and the expected market return is 17%.
TCBC is currently financed with 35% debt and 65% equity. TCBC has a B bond rating, a before-tax cost of debt of 12.50%, an after-tax cost of debt of 8.75%, a beta of 0.87, and forward P/E ratio of 17.
If all of the cash investment required to enter into the home security project must be paid today, what is the maximum that TCBC would be willing to pay for this project?
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2. McArnolds stock is valued using the constant dividend growth model. The stock price today is $75 per share. Dividends are expected to grow by 5% every year. McArnold’s total asset turnover is 2.50, its retention ratio is 40%, its earnings per share (based on the trailing twelve months or the last year) is $3.00, and its average collection period is 28 days.
What is the required return for McArnolds stock?
3. Proctor and Gamble (P&G) is ready to introduce a new detergent. P&G expects the new product to have a 10-year life. Based on all information available as of this morning, it correctly estimated all relevant cashflows for the project. Using the appropriate required return of 11%, P&G estimates that the project’s NPV is $55 million.
We also know that P&G has a beta of 0.43, depreciates all fixed assets using straight-line depreciation (5-year life; no salvage value), has an inventory turnover of 8, a corporate tax rate of 25%, and expects to maintain a net profit margin of 13% throughout the foreseeable future.
Later in the afternoon, the operations manager reports that, due to capacity constraints brought on by the expected growth of sales for the new product, P&G will be required to make new capital expenditures (CAPX) of $100 million at the end of the fifth year of the project’s life. The entire $100 million CAPX will be made at the end of year five. This incremental CAPX was not included in the earlier NPV calculation. The new CAPX will not affect terminal cashflows.
Show whether the new CAPX requirement will affect the project’s desirability.
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