Martha S
Subject:FinancePrice: Bought3
Martha S. Wine, president of “Santa 39% Rural Pig Farms” (SB), located in the US, is facing a bit of a crisis. The company specializes in selling equipment to pig farmers in continental Europe and its major competitor has recently launched a major advertising campaign that has been cutting into sales. Martha has decided to get down and dirty and ?ght back. She is considering a new project that will revolutionize farming. SB has developed a machine that catches eggs laid by chickens and moves them along a conveyor belt to a feeding station where pigs can eat the eggs. SB wants to market the idea to farmers on the basis that they can sell their pigs as “Bacon and Eggs”. Martha S. Wine hopes that the Bacon and Eggs project will provide SB with windfall pro?ts. They have dubbed the three-year project “ma”. You know the following: A. The productiou for project mm is to take place at the ?rm’s subsidiary in Schweinfurt, Bavaria, Germany. B. Compared to the US, the pig farming industry in Germany is small and the only ?rms in the industry are all privately owned. As a result, you are unable to directly obtain an industry beta for the pig farming industry in Germany. C. Because SB only recently went public (its [P0 was roughly 6 months ago), there is insuf?cient return data for you to come up with a reasonable estimate of SB’s equity beta. Instead, you can use information on the ?rm’s competitors as a basis for your beta estimation (no additional risk adjustments are necessary). You observe that: ——_—_—_ Equity ($111) 1,390 1 200 Total Capital cm 1.890 1.600 I_——-_ You assume that ?rms in the German pig farming industry are ?nanced similarly to 53’s US headquarters. D. In the past three years, the US and German stock markets have been fairly highly correlated (correlation coef?cient = 0.7). The standard deviation of German returns was 20% during that time period. You believe that both of these ?gures will remain unchanged in the coming 3 years. E. The equipment needed for SW costs 63,300,000 in year 0. The ?rm employs a straight-line depreciation method whereby every year it depreciates 33.33% of the equipment’s book value. The ?rm estimates that the equipment has no salvage value
at the end of the third year. F. The ?rm estimates that it will sell 500 machines in the ?rst year, 700 in the second, and 600 in the third. Each machine will be priced at €15,000. Each machine will cost the ?rm 8?,000 to produce. In addition, SB will have overhead costs of €200,000 per year. G. SB has no room in their current German factory to place the new mm so they are planning on renting a 25 ,000 square foot warehouse from a local real estate development family, the Balsam The cost for the warehouse' 1s €300, 000 per year in year 1 and will increase by 12% per year afterwards. This cost is n_ot included in the overhead costs in part F. H. Project mm will require that the ?rm increase net working capital (NWC) by €300,000 immediately and then maintain a balance equal to 10% of sales. At the end of the project, SB will recover all NWC (with no loss or gain). I. An outside consulting ?rm, Lomax and Co., conducted an 1.8.month marketing research study to determine whether consumers would purchase “Bacon and Eggs” in a single meat product. The cost to SB for the study was $400,000. To date, SB has only paid Lomax and Co. $320,000 and the remaining $80,000 is due at the end of the next year. J. You know that the ?rm is currently at its target capital structure. In addition, you have the following selected information about SE from their most recent balance sheet. E {numbers in $ millions! Year 2019 Total Assets 830 Liabilities: Current Portion of M Debt 0 Long — Term Debt 500 Equity: Paid in Capital 280 Common Equity 50 I: K. The company has one German bond issue outstanding. Eight years ago, they issued 30-year bonds with a face value of €1,000. The ?rm originally issued 400,000 of these bonds but repurchased and retired 100,000 of them in the last three years. The bonds have a face value of €1,000. The current yield to maturity on these bonds is
7.8?02% and each bond pays a semi-annual coupon of €42. L. The ?rm has 5,000,000 shares outstanding which currently sell for $100 per share. M. The rilefmerate in both Germany and the US is 4%. You ?irther know the following forecast (on which all investors agree) of the returns on the US market portfolio. The forecast is expected to remain unchanged each year for the next 3 years. Pmbabili Return on the market N. The ?rm has a tax rate of 35% in both Germany and the US. 0. You recently observed that a new party, the so-called V-Partei3, was founded in Germany tht_tps:Ilenwikipedia.org[wikifV-Partei3). You are concerned that if the party gains power during the upcoming Bavarian elections in 3 years, it will immediately (in year 3) expropriate your new factory and that all equipment, inventory, etc. will be lost. You expect the chance of this event (the combined likelihood of the election outcome and expropriation) to be 10%. P. As a result of its ongoing tariff dispute with the US, Germany’s government has recently passed legislation whereby it imposes a tax of 20% on any repatriated pro?ts to the US. Q. You observe the following information on the spot exchange rates and forward rates between the Euro and the US dollar: Spot rate: US$/€ 1.40 l-Year forward rate: US$/€ 1.50 2-Year forward rate: US$/€ 1.60 3-Year forward rate: US$/€ 1.?0
Book value at the Year t beginning of the Book value at the Depreciation end of the year year N
