Corporate Finance




                     Introduction to Corporate Finance - Assignment

Case

Cascade Water Company (CWC) currently has 30,000,000 shares of ordinary shares outstanding that trade at a price of $42 per share.

CWC also has 5,000,000 bonds outstanding that currently trade at $92.34 each.

CWC has no preferred shares outstanding and has an equity beta of 2.639. The risk-free rate is 3.5%, and the market is expected to return 12.52%. the company’s bonds have a 20-year life, a $100 face value, a 10% coupon rate and pay interest semi-annually.

CWC is considering adding to its product mix a healthy bottled water geared toward children.

The initial outlay for the project is expected to be $3,000,000, which will be depreciated using the straight-line method to a zero salvage value.

Sales are expected to be 1,250,000 units per year at a price of $1.25 per unit.

Variable costs are estimated to be $0.24 per unit, and fixed costs of the project are estimated at $200,000 per year.

The project is expected to have a three-year life and a terminal value (excluding the operating cash flows in year 3) of $500,000.

CWC has a 34% tax rate. (For the purposes of this project, working capital effects will be ignored).

Bottled water targeted at children is expected to have different risk characteristics from the company’s current products.


You have recently graduated with a degree in finance. Your employer, CWC wants you to work with the provided to data to address the given problems

a.     Determine the weighted average cost of capital for CWC.

b.   Should CWC go ahead with its proposed project of bottled water under the normal conditions as stated previously?

c.   Should CWC go ahead with its proposed project of bottled water under the following best case and worst case scenarios?


•         Best – Case Scenario

Selling 2,500,000 units at a price of $1.24 per unit, with variable production costs of $0.22 per unit.

•         Worst – Case Scenario

Selling 950,000 units at a price of $1.32 per unit, with variable production costs of $0.27 per unit.

d.  What would you do as the financial analyst? Which investment would you recommend, and why?


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