Hildebrand Consumer Products, Inc.
As you know, we have recently experienced stagnant growth. In preparation for my upcoming meeting with the Board of Directors, I am asking you to prepare a formal report that will brief me on the two most recent projects proposed by our operations department.
At a minimum, I need your report to contain the following:
-Executive Summary;
-Detailed analysis of each option, including:
- AFN analysis for each project;
- WACC for each project;
- Cash Flow analysis for each project; and
- NPV for each project;
-A detailed statement of your recommended course of action;
-Charts and graphs to assist me with my meeting
Please keep in mind that I have a limited amount of time, so some material can be presented in appendices. The report must be on my desk by close of business on December 11, 2016.
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Hildebrand Consumer Products, Inc. Balance Sheet
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Assets:
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Liabilities:
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Current Assets
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$995,000
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Accounts Payable
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$300,000
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Notes Payable
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$700,000
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Fixed Assets
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$3,000,000
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Other Current Liabilities
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$195,000
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Bonds Payable
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$1,200,000
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Total Liabilities:
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$2,395,000
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Equity
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$1,600,000
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Total Assets:
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$3,995,000
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Total Liabilities & Equity:
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$3,995,000
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Current Market Information:
700 Bonds - $1,000, 20 years, 10% stated rate, issued 8 years ago - currently selling at 0.97
500 Bonds - $1,000, 10 years, 15% stated rate, issued 3 years ago - currently selling at 1.05
100,000 shares of common stock - currently selling for $21.00 per share
Financial Analysis:
β = 1.15, RM = 22%, RRF = 2.5% Tax Rate = 40%
Lender Requirements:
Funds will only be distributed in even amounts of $50,000. (50,000, 100,000, 150,000, etc.) If AFN > $200,000 then the Pre-tax Cost of debt will be 15%; otherwise, it will be 18%.
PROJECT 1 SPECIFICATION -
Term: 5 years
Outlay: $500,000 for Equipment, depreciable over 5 years, salvage value $30,000
$200,000 lost opportunity with an existing vendor
$100,000 required NWC recoverable in Year 5.
In the first year, sales will increase $1,400,000. Sales are currently $14,000,000. The current profit margin is 20% and the payout ratio is 30%. After Year 1, it is likely that sales will grow 5% per year, and Cost of Goods Sold will grow by 2% per year. The company will need to borrow any funds identified through AFN analysis.
Best Case: After Year 1, sales will increase 7% per year. The assumption regarding Cost of Goods Sold would remain as stated above.
Worst Case: After Year 1, sales would decrease 3% per year and Cost of Goods Sold would increase 1% per year.
PROJECT 2 SPECIFICATION-
Term: 9 years
Outlay: $1,500,000 for Equipment, depreciable over 10 years, salvage value $160,000
$600,000 lost opportunity with an existing vendor
$250,000 required NWC recoverable in Year 9
$250,000 required in Year 5 to repair and maintain equipment
In the first year, sales will increase $1,950,000. Sales are currently $14,000,000. The current profit margin is 30% and the payout ratio is 55%. After Year 1, it is likely that sales will grow 7% per year, and Cost of Goods Sold will grow by 2% per year. The company will need to borrow any funds identified through AFN analysis.
Best Case: After Year 1, sales will increase 8% per year. The assumption regarding Cost of Goods Sold would increase 2% per year.
Worst Case: After Year 1, sales would increase 2% per year and Cost of Goods Sold would increase 3% per year.