Q1You are the CFO of Floor Tile Incorporated. There are two investment options your management team has asked you to getBoard approval on. The first is a new manufacturing plant in Indiana to service the local construction industry. The secondis a new product-line expansion for environmentally conscious consumers when they build or remodel their home. Below arethe 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 belowin the cash flow estimates. The company management estimates that the plant will continue to produce product for years tocome and have indicated that the earning potential of the plant will be worth $10 million at the end of year five. Please takethis into consideration when you consider the value of the plant. Floor Tile Inc. has a weighted Average Cost of Capital of11%. The CFO believes this investment is consistent with the company’s existing business model and has the same riskprofile.  New Plant in Indiana (dollars in millions)  Year 1Year 2Year 3Year 4Year 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 formanufacturing as well as the equipment. Because this new environmentally friendly tile is much more expensive thecompany feels they will need a new sales force and it will take a few years before the product is cash flow positive due tothe ramp up of sales. It is a different customer base and the CFO believes consumers will turn back to lower cost product atthe expense of the environment so he is certain it is more risky than the company’s traditional business. He has used datafrom companies with environmentally focused products to determine this project’s Weighted Average Cost of Capital is13%. It too will have a terminal value and the management team estimates that at the end of 5 years the new product linewill be worth $22 million.    New Environmentally Friendly Tile (dollars in millions)  Year 1Year 2Year 3Year 4Year 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 decisionabout proposing the project?                       Q2The 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                               Q3You 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 tradingat 2.0%. The Company’s debt currently has an interest rate of 7.0% and is trading at par. The Company’s tax rateis 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 havewell into the future. What is the Company’s cost of capital?                  Q4Use 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 Statement20092010   Revenue$460.0$700.0 Cost of Goods Sols165.6 238.0  Gross Profit294.4 462.0  Sell., Gen. and Admin. Exp.207.0 301.7  Operating Income$87.4$160.3   Interest Expense2.0 6.0  Pre-Tax Income85.4 154.3  Taxes29.9 54.0  Net Income$55.5$100.3   Balance Sheet20092010   Cash$75.0 $35.5  Accounts Receivable92.0 210.0  Inventory69.0 126.0  Total Current Assets$236.0 $371.5    Property Plant and Equipment184.0 280.0  Total Assets$420.0 $651.5    Accounts Payable59.8 91.0  Total Current Liabilities$59.8 $91.0    Debt50.0 150.0  Total Liabilities$109.8 $241.0    Shareholders’ Equity310.2 410.5  Total Liabilities & Shareholders’ Equity$420.0 $651.5    Statement of Cash Flow20092010   Cash Flow from Operation Net Income$55.5$100.3 Change in Working Capital(143.8) Depreciation26.3  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 Debt100.0  Issuance/(Repurchase) of Equity0.0  Cash Flow from Financing Activities$100.0    Cash Flow Generated/(Used) During the Year($39.5)   Beginning of Year Cash75.0  End of Year Cash35.5