Kokomochi plans to spend $5 million on advertising compaign this year. The ads are expected to boost sales of the Mini Mochi Munch by $12 million this year and by $8 million next year. In addition, sales of other products are expected to rise by $2 million each year. The gross profit margin for the Mini Mochi and all other products is 25%. The marginal coporate tax rate is 40% in each year. 1- Calculate the incremental earnings associated with the advertising campaign? 2- Suppose Kokomochi has no depreciation, nor capital expenditures in the advertising compaign project. Its net working capital increases by $1 million this year, but decreases by $1 million next year. Calculate the free cash flows for the advertising campaing. 3-Kokomochi is a firm with 50% debt and 50% equity. The interest rate on its debt is 10%, and the coporate income tax rate is 40%. The expected rate of return on itts equity is 14%. Calculate Kokomochi's WACC 4- Suppose the advertising campaign is an average risk project. Calculate its NPV. sould we take the advertising campaign or not based on the NPV rule for a single project?
If the answer for question one is Incremental Earnings
Year 1 Year 2
Sales of minimochi munch $ 12,000,000.00 $ 8,000,000.00
Other Sales $ 2,000,000.00 $ 2,000,000.00
How to calculate the cost of good sold and the gross profit?