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Strategic Financial Management Project #1 INSTRUCTIONS: PROJECT #1: Equity Instruments 1. You have been asked to estimate the cost of equity for Hadley Holdings, a firm with operations in three...

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Strategic Financial Management
Project #1
INSTRUCTIONS:
PROJECT #1: Equity Instruments
1. You have been asked to estimate the cost of equity for Hadley Holdings, a firm with operations in three different businesses – retailing, hotels, and travel. You have collected information on the firm’s operations and of comparable firms in each of the businesses.
Comparable Firms
    
    Revenues
    Unlevered Beta
    Firm Value/Sales
    Retailing
    $400 Million
    0.85
    2.0
    Software
    $400 Million
    1.15
    3.0
    Travel
    $800 Million
    1.35
    1.25
a. Estimate the bottom-up unlevered beta for Hadley Holdings. ( 20 points)
. Hadley Holdings has no market-traded debt. The firm does, however, have $ 1.2 billion in book debt and an interest expense of $ 60 million. If the debt has an average maturity of 5 years, and the fair market rate for debt for the firm is 7%, estimate the market value of the debt. ( 20 points)
c. Hadley Holdings has 100 million shares outstanding trading at $ 10 a share. In conjunction with the estimated market value of debt in (b), estimate the bottom-up levered beta for the firm. (You can assume a marginal tax rate of 40% XXXXXXXXXXpoints)
2. Now assume that you have been asked to estimate the free cash flow to the firm last yea
for Hadley Holdings and have collected the following information.
• The firm reported earnings before interest, taxes, depreciation, and amortization of $350 million on its revenues of $ 1600 million.
• Depreciation and amortization charges amounted to $ 100 million and capital expenditures were $ 200 million.
• Hadley spent $ 100 million last year on research and development in its software division, following R&D expenditures of $ 60 million (3 years ago), $ 75 million (2 years ago), and $ 90 million (1 year ago) in the prior three years. You believe that research expenditures have an amortizable life of 3 years.
• The working capital items for the last year and the previous year are reported below.
    
    Last Yea
    Year Before Last
    Cash
    $100 Million
    $80 Million
    Accounts Receivable
    $80 Million
    $90 Million
    Inventory
    $150 Million
    $100 Million
    Accounts Payable
    $130 Million
    $110 Million
    Short-Term Debt
    $150 Million
    $130 Million
• The tax rate for the firm is 40%.
a. Estimate the value of the research asset of the firm. ( 10 points)
. Estimate the operating income adjusted for R&D expenditures. (10 points)
c. Estimate the free cash flows to the firm last year. ( 30 points)
Answer all questions and show the necessary work. Please be
ief. This is an open book and open notes exam
Answered 9 days After Feb 24, 2023

Solution

Nitish Lath answered on Feb 26 2023
18 Votes
Sheet1
    FIN 660 Group Project #1 Equity Instruments                         Color Codes
                    FIN 660 Group Project #1 Equity Instruments
                            Calculated
    Problem 1                        Qualtitative answe
    a. Unlevered bottom-up beta
    Business    Revenues    Value/Sales    Estimated value    Unlevered beta    Weights    Weight * Beta
    Retailing    $400    2    $800    0.85    26.67%    0.23
    Sotware    $400    3    $1,200    1.15    40.00%    0.46
    Travel    $800    1.25    $1,000    1.35    33.33%    0.45
                $3,000        Beta    1.137
    b. Estimated market value of debt
    Book value =    $1,200
    Interest...
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