1. What are the initial sales (year 1)?
2. What is the annual sales growth (years 2 to 5)?
3. What are the operating expenses (as a % of sales) and what are the fixed costs?
4. What is the upfront investment in net fixed assets (i.e., the initial capital spending) you need to make today (year 0)? Depreciate the value of these assets on a straight-line basis to zero over the five-year horizon.
5. What is the salvage value of these assets at the end? (has to be a positive number)
6. What is your upfront investment in net working capital (year 0)?
7. Starting in year 1, net working capital (the liquidity you need) will be based on how much are your sales. How much (as a % of sales) do you need to retain in NWC every year? (for example, you can assume that you need NWC equal to 10% of sales each year after year 0 and then figure out the change in NWC each year). The last year you assume that you recover all the dollar amount invested during this period in NWC.
8. Assume that the corporate income tax rate is 21%.
Cost of Capital (WACC)
I. How much of your total assets will be financed with debt and how much by equity (i.e., your own capital)? Use this information to determine the equity weight (i.e., E/A) and debt weight (i.e., D/A). In other words, you should choose your “target” debt-equity mix. If you are not sure what this mix should be, find the (Total) Debt/Equity ratio or the “debt ratio” (Total) Debt/ Assets for the industry (both numbers should be based on market values). Otherwise let us know what you chose and why.
II. What is the cost of debt for your company? Assume that the cost of debt for your company is: The 3-month Treasury Bill rate + 7%. In the current economic environment, the T-Bill rate is unusually low, so we want you to use 3%. (NOTE: In future classroom or business situations, when things settle down in the economy, you can find the 3-month T-Bill rate from the Saint Louis Fed’s FRED https://fred.stlouisfed.org/.) The 7% premium is to account for your company’s default risk. So, your company’s cost of debt is 10%.