Q1 You are the CFO of Floor Tile Incorporated.  There are two investment options your management team has asked you to get     Board approval on.  The first is a new manufacturing plant in Indiana to service the local construction industry.  The second     is a new product-line expansion for environmentally conscious consumers when they build or remodel their home.  Below are     the cash flow estimates for both projects along with some notes on each.                                                                  New Plant                       The new plant will cost $15 million to build.  The plant will lose money the first year as it ramps up which can be seen below         in the cash flow estimates.  The company management estimates that the plant will continue to produce product for years to         come and have indicated that the earning potential of the plant will be worth $10 million at the end of year five.  Please take         this into consideration when you consider the value of the plant.  Floor Tile Inc. has a weighted Average Cost of Capital of         11%.  The CFO believes this investment is consistent with the company’s existing business model and has the same risk         profile.                           New Plant in Indiana                     (dollars in millions)                         Year 1 Year 2 Year 3  Year 4 Year 5               Free Cash Flow ($1.0) $3.0 $4.0 $5.5 $17.0                                                                 New Product Line                       The new product line will cost $25 million up front to launch.  The $25 million will include the price of a new plant for         manufacturing as well as the equipment.  Because this new environmentally friendly tile is much more expensive the         company feels they will need a new sales force and it will take a few years before the product is cash flow positive due to         the ramp up of sales.  It is a different customer base and the CFO believes consumers will turn back to lower cost product at         the expense of the environment so he is certain it is more risky than the company’s traditional business.  He has used data         from companies with environmentally focused products to determine this project’s Weighted Average Cost of Capital is         13%.   It too will have a terminal value and the management team  estimates that at the end of 5 years the new product line          will be worth $22 million.                                                 New Environmentally Friendly Tile                   (dollars in millions)                         Year 1 Year 2 Year 3  Year 4 Year 5               Free Cash Flow ($3.0) ($1.0) $5.0 $8.0 $36.0                                                                 Should the CFO propose both projects to the board.  Why or why not?  How did you determine this?  Show your work.                             (10) Project 1                                                                                                                                                                                                                                                                                                                                               (10) Project 2                                                                                                                                                                                                                                                                 (5) What discount rate did you use for the New Product line?  Why?                                                                                                                      (5) If the CFO chose to use the companies Cost of Capital to assess the new product line would he have made a different decision     about proposing the project?                                                                                                                                                                                                                                                                                       Q2 The current 10 year government bond is trading at 2.0%.  The beta of the market is 1.0.  The long term equity risk premium is 7%.                                                     (5) Draw the Security Market Line (SML).  Label both Axes.                                         (10) Now show where a stock would fall on that line if it had a beta of 1.4?  What would its expected return be?                                                                                                                                                                                                                             SML                                                                                                                                                                                                                                                                                                                                                                                             Q3 You are trying to decide what the WACC of a Company in the mining industry should be.  You have determined     (15) from its peer companies that the unlevered beta for the industry is 1.25.  The 10 year government bond is trading       at 2.0%. The Company’s debt currently has an interest rate of 7.0% and is trading at par.  The Company’s tax rate       is 37%.  The equity risk premium is 7%.  The Company currently has a market value of $700 million.  It has $114.5`       million in net debt outstanding (see statements below).  This is the capital structure the company expects to have       well into the future. What is the Company’s cost of capital?                                                                                                                                                                                                                             Q4 Use the data from Question 3 plus the data below.                                                                   (10) What is the Company’s 2010 EBITDA Multiple?                                                                                                                                                                                                       (10) What is the Company’s 2010 P/E multiple?                                                                                                                                                                             (10) What is the Company’s Return on Capital?                                                                                                                                                                                                       (10) What is the Company’s 2010 DSO?                                                   days                                             Mining Co. Inc. – Income Statement   2009 2010                                       Revenue         $460.0 $700.0             Cost of Goods Sols       165.6 238.0             Gross Profit       294.4 462.0             Sell., Gen. and Admin. Exp.     207.0 301.7             Operating Income       $87.4 $160.3                                       Interest Expense       2.0 6.0             Pre-Tax Income       85.4 154.3             Taxes         29.9 54.0             Net Income       $55.5 $100.3                                       Balance Sheet       2009 2010                                       Cash         $75.0 $35.5             Accounts Receivable       92.0 210.0             Inventory         69.0 126.0             Total Current Assets       $236.0 $371.5                                       Property Plant and Equipment     184.0 280.0             Total Assets       $420.0 $651.5                                       Accounts Payable       59.8 91.0             Total Current Liabilities     $59.8 $91.0                                       Debt         50.0 150.0             Total Liabilities       $109.8 $241.0                                       Shareholders’ Equity       310.2 410.5             Total Liabilities & Shareholders’ Equity   $420.0 $651.5                                       Statement of Cash Flow     2009 2010                                       Cash Flow from Operation                     Net Income       $55.5 $100.3             Change in Working Capital       (143.8)             Depreciation         26.3             Free Cash Flow from Operations     ($17.2)                                       Cash Flow from Investing                     Additions to Property Plant and Equipment     (122.3)             Free Cash Flow from Investing       ($122.3)                                       Cash Flow from Financing                     Issuance/(Paydown) of Debt       100.0             Issuance/(Repurchase) of Equity       0.0             Cash Flow from Financing Activities     $100.0                                       Cash Flow Generated/(Used) During the Year   ($39.5)                                       Beginning of Year Cash       75.0             End of Year Cash         35.5