Homework 1 FINC-6320-01. Due Sunday by 11:59pm Points 10 Submitting a file upload

Clear LONGHORN BAGS HOMEWORK #1 - FINANCIAL MODEL STUDENT NAMES: MODELING ASSUMPTIONS ($ in Thousands) Initial Investment CapEx $1,000.0 (A/R + Inventory) / Sales 20.0% Acct. Receivables + Inv. 750.0 (A/P + Accrued Exp.) / Sales 15.0% Accts. Payables+Accrued Exp. 500.0 Net Working Capital 250.0 CapEx / Sales 3.5% Total Net Investment $1,250.0 CapEx Depreciation (Yrs.) 10.0 Hint: Depreciation is calculated based 2023E Sales $5,625.0 off of the cumulative CapEx of prior years Annual Sales Gr. % '23E-'27E 10.0% Tax Rate 25.0% Gross Profit Mgn. % '23E-'27E 30.0% Terminal Value (Liq. Proceeds) @ 2027 OpEx Before Depr. as % Sales 22.5% Mult. of '27E Net PP&E+NWC 1.0x Debt $0.0 Cost of Capital 15.0% CAPEX, DEPRECIATION & WORKING CAPITAL ($ in Thousands) PP&E 2022 2023E 2024E 2025E 2026E 2027E Beg. PP&E CapEx Depreciation Ending PP&E Cumul. CapEx WORKING CAPITAL A/R + Inv. A/P + Exp. Net WC Change in NWC PRO FORMA INCOME STATEMENT ($ in Thousands) 2023E 2024E 2025E 2026E 2027E Sales CoGS Gross Profit OpEx Before Depreciation Depreciation Total OpEx EBIT Interest Expense EBT Taxes Net Income DISCOUNTED CASH FLOW ANALYSIS ($ in Thousands) 2022 (Investment) 2023E 2024E 2025E 2026E 2027E EBIT Taxes NOPAT Depreciation CapEx Change in NWC Sub-Total Terminal Value FCFs Discount Rate NPV Implied IRR PAGE 2 SENSITIVY ANALYSES ($ in Thousands) NPV SENSITIVITY Sales Growth Gross Margin 20.0% 25.0% 30.0% 35.0% 40.0% 5.0% 7.5% 10.0% 12.5% 15.0% PAGE 3

FINC 6320 Homework #1 Team Names: _______________________________ Question 1 (50 points total) Longhorn Enterprises is a private start-up based in Austin, TX that will make high-end leather bags. It wants to launch its products in the U.S. and, as such, needs to build a manufacturing facility in New Mexico. Goal is to have plant for 5 years and then liquidate it in 2027 at 1.0x the 2027 ending balance of net PP&E + working capital. Longhorn’s investment will be $1,500K in capital expenditures plus $250K in net working capital which is comprised of ($1,000K) in accounts receivables (A/R) and inventories minus $750K in accounts payables (A/P) and accrued expenses. The attached Excel spreadsheet shows all other required assumptions. a. Attach model to Canvas submission. Instructor will check for structure/interactivity of model [10 points] b. What is the project’s NPV? [10 points] c. Change the annual sales growth to 15% and gross margin to 25%. What’s the new NPV? [10 points] d. Conduct a Goal Seek break-even analysis. What is the break-even gross margin required for this project to have a positive NPV? [10 points] e. Conduct a 2x2 sensitivity analysis of sales growth (5%-15%) and gross margin (20%-40%). What conclusion do you make about this business case? [10 points] Question 2 (20 points total) NewCorp is a corporation of cosmetics and medical subsidiaries. The cosmetics subsidiary is worth $20M while the medical subsidiary is worth $30M. The firm has a debt-to-capitalization ratio of 50%. The tax rate for all firms is assumed to be 30%. The risk-free rate is 7% and the market risk premium is 6%. The following information has been obtained for firms with comparable systematic risk: Comparable Firms               Average β         Average D/E Ratio Cosmetics 0.9 20% Medical 1.2 60% Note that the average βs above denote the average of the levered or equity βs of these firms. Also, note that the combined entity’s unlevered β is the weighted-average of the unlevered βs of its respective subsidiaries. A) Calculate New Corp’s levered β (10 points) B) What is its cost of equity? (10 points) Question 3 (20 points total) You have been approached by the owner of a successful restaurant in Dallas who is raising $275,000 of new equity to fund the investments necessary to support anticipated growth over the next few years. The restaurant owner tells you his restaurant will generate (in yr. 1) $1,000,000 in revenues and incur operating cash expenses of $650,000. He expects revenue and expenses to grow 2% in perpetuity. He also expects capital expenditures and depreciation each to be equal to 5% of sales. Working capital is 2% of sales. You believe that the target capital structure is debt-free. The average tax rate is 25%. A review of comparable publicly-traded companies indicate a levered beta of 2.0 with average debt/(debt+equity) of 50%. The risk-free rate is 3.0% and market risk premium is 6.0%. A) What is the expected rate of return on equity? [10 points] B) What percentage of the equity in the restaurant would you expect if you were to provide the entire $275,000? [10 points] Question 4 (10 points total) Suppose Kraft Foods’ stock has a beta of 0.50, whereas Boeing’s beta is 1.25. If the risk-free rate is 4%, and the expected return of the market is 10%, what is the expected return of an equally-weighted portfolio of Kraft Foods and Boeing stocks, according to CAPM? [10 points] 1