1 uell decldes LhaL lL ls Llme for lL Lo enLer Lhe LableL C markeL lL decldes Lo lnLroduce lLs flrsL Louch

screen LableL 1he LableL wlll cosL uS$ 300 per LableL (Lhls ls reLall prlce uell wlll sell Lhe LableL Lo
8eLallers aL $240 per LableL 8ased on lLs suppller conLacLs uell knows LhaL lL can geL Lhe LableLs made ln
Chlna for a cosL of $100 per LableL
uell decldes lL wlll develop lLs LableL around opensource Andrlod plaLform and lL wlll have Lo reLaln 30
developers aL $300000 per developer Lo develop Lhe sofLware plaLform for Lhe app 1hls wlll be an
upfronL cosL uell wlll also bear uS$ 30000000 ln Lnglneerlng and ueslgn cosLs for Lhe pro[ecL aL Lhe
sLarL of pro[ecL
uell wlll also requlre a CuallLy Assurance faclllLy whlch wlll cosL $ 3000000 per annum lL wlll also reLaln
10 developers [ uS$ 200000 per developer per annum for Lhe llfe of Lhe pro[ecL for plaLform
modlflcaLlons and upgrades
uell esLlmaLes LhaL lL wlll need Lo spend $ 10000000 each year on adverLlslng for Lhe pro[ecL lL wlll also
use lLs exlsLlng warehouse for shlpmenL of sLores 1he warehouse lnfrasLrucLure ls bllled aL $10000000
each year renL 1he phones are llkely Lo Lake 3 of warehouse space 1he LoLal depreclaLlon of
warehouse lnfrasLrucLure ls $ 1000000 per annum
uell esLlmaLes LhaL lL wlll sell 2300000 unlLs ln flrsL year 4000000 unlLs ln second year and 4000000
unlLs ln Lhlrd year ln 4
Lh
year whlch ls anLlclpaLed Lo be Lhe lasL year of Lhe pro[ecL uell wlll sell
2000000 unlLs
uell flnds ouL LhaL lLs LoLal buslness cycle wlll be of 10 days (le nWC/8evenue 10/363)
a) repare pro[ecLed lncome sLaLemenL and cash flow sLaLemenL (Assume Lax raLe of 40)
b) uell's preLax cosL of debL ls 7 whlle lLs cosL of equlLy ls 12 lf lLs caplLal sLrucLure comprlses
40 debL and remalnlng equlLy whaL ls uell's WACC?
c) WhaL ls nv of Lhe pro[ecL?
d) lf Lhere was producL cannlballsm Lo some of uell's exlsLlng producL wlll Lhe nv be more or
less?
e) lf uell has beLa of 103 rlskfree raLe of 1 and markeL's expecLed reLurn of 3 WhaL wlll be
uell's cosL of equlLy and WACC?
f) CalculaLe senslLlvlLy for 10 lncrease and decrease ln revenue
g) CalculaLe senslLlvlLy for 10 lncrease and decrease ln cosL of manufacLurlng
h) CalculaLe senslLlvlLy for 30 lncrease and decrease ln markeLlng expense
l) lor WACC calculaLed ln secLlon(e) calculaLe senslLlvlLy for 30 basls polnL (03) lncrease and
decrease ln rlskfree raLe
[) lf Lhls pro[ecL doesn'L end ln year 4 buL conLlnues aL a perpeLual growLh raLe of 3 whaL wlll be
nv?

2 ?ou are abouL Lo open a reLall ouLleL ln Lahore ?ou esLlmaLe LhaL ln flrsL year you wlll have 1000
cusLomers vlslLlng you each week wlLh each cusLomer spendlng on average k8 2000 ?ou also esLlmaLe
LhaL your CperaLlonal expenses for flrsL year wlll be k8 300000/monLh for flrsL year and Lhey wlll
lncrease by lnflaLlon each year ?ou flnd ouL LhaL your CCCS wlll be 80 of your revenue and your
numbers of days of operaLlon wlll be appox 1 week (refer Lo quesLlon 1 for explanaLlon)
?ou esLlmaLe LhaL you wlll have Lo spend k8 10000000 on buylng Lhe shop and furLher k8 3000000
on renovaLlon ln Lhe beglnnlng ?ou also expecL a markeLlng budgeL of k8 60000/monLh for markeLlng
ln year 1 whlch wlll lncrease by same raLlo wlLh revenue ln subsequenL years
?ou wlll also spend k8 100000 on company reglsLraLlon and Lrademark reglsLraLlon and k8 100000
on logo deslgn aL Lhe sLarL of Lhe buslness 1ax raLe ls 33
?our bank guaranLees you a loan [ 16 whlch comprlses 40 of your LoLal caplLal ?our remalnlng 60
of caplLal wlll be your own equlLy lor a buslness llke Lhls Lhe cosL of equlLy of comparable buslnesses ls
20
?ou expecL your depreclaLlon Lo be 10 of your flxed asseLs and your CALx each year Lo be equal Lo
depreclaLlon
?ou expecL your revenue Lo grow by 30 ln year 2 40 ln year 3 30 ln year 4 13 ln year 3 and 10
ln year 6 and Lhen sLablllze [ 10 growLh
a) repare pro[ecLed lncome SLaLemenL and Cash llow SLaLemenL
b) WhaL's WACC?
c) WhaL ls nv of 8uslness?
d) WhaL wlll nv be lf WACC lncreases or decreases by 10 of lLs orlglnal value (means lf WACC ls
20 +10 would mean 22 and 10 would mean 18)
e) lf LoLal lnlLlal loan of buslness ls k8 80000000 whaL ls buslness' value of equlLy?
f) lf buslness has 100000 shares lssued whaL ls Lhe prlce of each share
g) WhaL wlll nv be lf buslness grew by +/10 of base growLh ln each of flrsL flve years and durlng
Lermlnal year?
h) WhaL wlll nv be lf CCCS was 90 Lo 70 of revenue?