Worldwide Paper Company wants to include a new on-site woodyard. This case is parallel to many different real-life business problems you might be presented with every day. This is the bread and butter of corporate finance.
In this case, you have two primary problems. First, you need to determine the appropriate hurdle rate for WPC. After you know the hurdle rate, then you can determine the profitability of adding a new on-site woodyard. You should find all of the information you will need in Exhibit 18.1. Combining the previous two steps will allow you to decide what WPC should do regarding their investment.
To help, I want you to break down the problem into more manageable steps.
1. Compute the WACC
a. Compute the equity cost of capital
b. Compute the debt cost of capital
2. Compute the cashflows from the investment project
3. Compute the NPV and IRR to make an investment decision.
Case Presentation:
Even though this is an online class, for this project, you will create a PowerPoint detailing the background of the case and your proposed solutions. You should consider this PowerPoint to be an overview of what you will provide in the written case report. Each presentation should be as if you were going to present to the board of WPC. Refer to the case questions.
To give you more guidance for the first case. Your presentation should be structured as follows:
1. Case background
a. Here you should give an overview of the case. Discuss the background of the company. You do not need to be limited to only material discussed in the case.
2. Case Issues
a. Outline the issues you identify in the case.
3. Potential Solutions
a. Outline the solutions you are presenting the WPC. Give full explanations. Any necessary calculations need to be included in the written report.
4. Conclusion
a. A summary of your final recommendations
The written report (2-3 pages, no upper limit) should have (at minimum) the following sections:
1. Case background
2. Potential solutions to the case
3. Conclusion and final recommendations
4. Work Cited
5. Additional question responses
6. Index (Include all of your calculations here, no minimum requirement).
Project Deliverables (Should be submitted by the deadline):
1. A Powerpoint presentation presenting the primary issue and background of the case
2. A written case report detailing your solution to the case.
Rf = 2.04%
(rm rf) = 6%
Rm = 8.04%
Beta = 1.1
Rs = 8.64%
Rd = 3.85%
E = 500
D = 2500
V = 3000
Tc = 40%
WACC = (E/V*rs)+(D/V*rd*(1-tc)) =3.37%
6 years Savings 2M + 3.5M*5(yrs)= 19.5M
Total profit (before tax) = Total Revenue cost of good sold SG&A total working capital
= 54M 54M * 75% 54M * 5% 54M * 10%
= 5.4M
Total profit (after tax) = 5.4M * (1-0.4) = 3.24M
Total investment (depreciation) = 16 + 2 = 18M
Net income = 19.5-18+3.24= 4.74M
Discount rate
1.15%
2016
2017
2018
2019
2020
2021
2022
cash flow (Million)
-16
0.24
4.1
4.1
4.1
4.1
4.1
NPV
$3.82
IRR
6.89%
