1. HalfFull Enterprises is a producer of pre-packaged ice, headquartered in Quebec, Canada. Global warming is transforming the retail ice industry. You are consulting for Ms. Leau DeGlace, heir to the...

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1. HalfFull Enterprises is a producer of pre-packaged ice, headquartered in Quebec, Canada. Global warming is transforming the retail ice industry. You are consulting for Ms. Leau DeGlace, heir to the DeGlace ice dynasty and successor to Francois DeGlace, the charismatic founder, former CEO, and general personification of the company. Optimistic investors liked to say: “DeGlace is HalfFull.” In an effort to reinvigorate company sales, the younger DeGlace intends to branch out into a new product line: very high-end, incredibly insulated (and expensive) ice chests, sold under the brand name sasquatch. Unwilling to move at a glacial pace, Ms. DeGlace has already invested $15 million in research and development, with another $5 million committed in contract for renting a production facility. The Sasquatch coolers are premium, highly technical products. Although they will be priced at $500 per unit retail, consumers will need to use far less ice in them. Indeed, the company estimates that for every Sasquatch sold, the company will lose about $10 in net retail ice sales per year in perpetuity. Starting with the first year of production, the company expects to sell 10,000 units per year. Production costs at 35% of sales. To manufacture the Sasquatch will require a capital expenditure of 8 million (depreciated straight line to zero over a four year accounting life), in addition to the expenditures on research and development and the rental contract mentioned above, the company is willing to project the project out f4 years, at which point they expect to liquidate the assets at their book values. The company will require a lot of net working capital, mostly in the form of inventory. The company will start with half a million in net working capital, and then move to 10% of sales. Calculate, NWC, NPV, CFA, and IRR 2. You have two stocks, A and B, that have expected returns of 12% and 16% respectively, and standard deviations of returns of 40% and 30%, respectively. If they are uncorrelated, what is the standard deviation of a portfolio that has 2/3 weight in A and the rest in B? 3. You have two stocks, A and B, that have expected returns of 12% and 16% respectively, and standard deviations of returns of 40% and 30%, respectively. If they are uncorrelated, what is the minimum standard deviation of the portfolio that can be achieve with these two assets? 4. There are three states of the world, rain (probability 50%), sleet (25%), and snow (25%). Stock C has returns in those states of 40%, -20%, and 0% respectively. Stock D has returns in those states of 20%, 10%, and 0%, respectively. What is the correlation between the two stocks? 5. You have two assets, one with a beta o 0.5, the other with a beta of 1.5. What will be the expected return of an equal-weighted portfolio if the risk-free rate is 2% and the market expected return is 11%? 6. You identify an asset that has a beta of 0.7 and expected return of 11.4%. The market expected return is 14% and the risk-free rate is 4%. What is the asset’s alpha? 7. Compute the WACC for the following: A firm has an equity beta of 1.3. The market expected return is 10% and the risk-free rate is 3%. The firm’s debt-equity ratio is 2.5. The firm has a bond issue that sells for 95% of par, matures in three years, and has a coupon rate of 5%. The tax rate is 40%. 8. You are trying to extimate the cost of capital for an all-equity financed private convenience store chain, Schmuckee;s. You can use as comparison some publicly traded firms that are in the same industry: 11to7 Corp, Valero Inc, and WhaWhat LTF. These companies all have equity betas (D/E ratios) of 1.8(1.3), 1.2(0.7), and 0.8(0), respectively. All firms face a tax rate of 40%. If the expected market return is 11% and the risk free rate is 3%, what is a good WACC to use for Schmuckee’s? 9. Essay question: Explain what should and what should not be included in “relevant incremental cash flows” and why.