[23/04, 22:50] Qaiser Freelance: Assignment text

VROOM,1 which is listed on the New York Stock Exchange, is a company that supplies technology for
electric cars, with Tesla as their most important customer. Their main product is called V1. VROOM has
just finished a development project of a new and cleaner technology, and they are now considering
whether to put the new technology, called V2, into production and introduce it to the market.

The completed development project has lasted over the past 5 years and cost a total of $100 million.
The development costs of $100 million are paid in equal installments. The last $20 million must be paid
at the end of the current year (year 0).2

To put V2 into production, investments must be made this year (year 0) of $70 million. The investment is
depreciated using the balance method with a depreciation rate of 20%. The equipment is depreciated at
the end of the project.

As a follow-up to the development project, a market survey has recently been carried out which
estimates that the new technology will generate sales revenue of $50 million in its first year of operation
(year 1), which will subsequently grow by 10% per year. VROOM expects that they can sell the new
technology for 10 years.

Sales of V2 are large orders where VROOM gives customers a one-year payment deferral. Variable costs,
which are paid on an ongoing basis, make up 45% of sales, while fixed costs (also paid on an ongoing
basis) will be $10 million. VROOM has estimated that the need for working capital amounts to 40% of
next year's sales. The $5 million market research expense is due in one year (year 1).

[23/04, 22:50] Qaiser Freelance: For the first 4 years, V2 and the original technology V1 will partly be
produced in the same premises. Sales of V1 have until now provided a stable cash flow of $20 million a
year. The introduction of V2 and the joint production will mean that the cash flow from V1 will fall
evenly (linearly) over the 4 years V1 and V2 are produced together. In year 5, V1 is completely phased
out. After 10 years, VROOM expects that the production facilities will have to be scrapped and
completely new investments will have to be made.

All amounts are measured in current (nominal) US $. Inflation in the coming years is expected to be 3%
annually. VROOM is in skate position and pays 22% tax.

VROOM is financed in the following way:

• A bond loan with a 3% annual coupon rate, half-yearly coupon payments, and 20 years to maturity. A
total of 50,000 bonds have been issued, each with a face value of $1,000, and a market price of 119.80%
of the face value.

• 2 million shares have been issued, each with a face value of $100. A dividend of $10 per share has just
been paid. share, and the market expects the dividend to grow by 6% a year for the next 8 years, then to
grow by 4%.
• A serial loan with monthly payments, nominal annual interest of 4%, and 15 years remaining term.
When the loan was entered into, the loan was for $30 million and had a term of 20 years.

1 VROOM is here a fictitious company. You can disregard the fact that there is a company called
VROOM. 2 Cash flows come at the end of the year.

[23/04, 22:50] Qaiser Freelance: Task 1

a) What is the WACC for the company VROOM?

The group itself must calculate all components included in the WACC. This includes effective returns,
market values, each funding source's weight in the WACC, as well as estimates of VROOM's beta, risk-
free interest rate, and the market's risk premium.3 For the latter calculations, data attached to
Wiseflow, but which is also available on OneDrive, shall be used. The estimates must be explained and
justified. Show all necessary calculations. (Explanation in document up to 250 words.)

b) How will the share price of VROOM in question 1a change if the first dividend is paid in half a year,
and then at one-year intervals. Other assumptions about growth in dividends are kept unchanged. For a
full exclusion, a new price must be calculated in addition to an explanation. (Explanation in document up
to 150 words.)

Task 2

a) What are the cash flows to the total capital (eter skat) by putting V2 into production?

All choices must be explained and justified. Show all necessary calculations. (Explanation in document up
to 250 words).

b) Briefly explain what constitutes working capital. Briefly explain whether VROOM's estimate of the
need for working capital makes sense? (Explanation in document up to 200 words).

c) Take as a starting point the cash flow that you have calculated for year 1. Calculate the present value
(in year 0) for both the nominal and real cash flow in year 1. Explain the answer there and show
calculations. (Explanation in document up to 200 words).

Task 3

a) Should the project be carried out?

All choices must be explained and justified. Show all necessary calculations. (Explanation in document up
to 300 words).

Theory thesis

Task 4

a) Explain what debt beta is for a risk-free loan (up to 150 words, only to be submitted in a document).
b) Briefly explain the Capital Value Model (KVM) and the various components included in the model (up
to

150 words, delivered only in document)

c) Briefly explain (up to 200 words, only to be submitted in a document) what you have to do in order to

profitability assessments using the equity method and the total capital method must give the same net

present value.

d) Briefly explain why the cost of equity will typically be different from the cost of debt (up to

100 words, delivered only in document).