The following information pertains to Fairways Driving Range, Inc.: The company is considering operating a new driving...

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Finance

The following information pertains to Fairways Driving Range,Inc.:
The company is considering operating a new driving rangefacility in Sanford, FL. In order to do so, they will need topurchase a ball dispensing machine, a ball pick-up vehicle and atractor and accessories for a total cost of $103,000. All of thisdepreciable equipment will be 5-year MACRS property. The project isexpected to operate for 6 years, at the end of which the equipmentwill be sold for 25% of its original cost. Fairways expects to have$33,000 of fixed costs each year other than depreciation. Thesefixed costs include the cost of leasing the land for the drivingrange. Fairways expects to have sales for the first year of$103,000 based on renting 20,600 buckets of balls @ $5 per bucket.For years 2-6, they expect the number of buckets rented to steadilyincrease by 1,100 buckets per year, while the price will remainconstant @ $4. Expenditures needed for buckets and balls each yearare expected to be 23% of the gross revenues for the year. Fairwayswill be in the 35% tax bracket for all years in question.
The company has a required capital structure of 40% debt and60% equity. They can issue new bonds to yield 5.5%. With respect toequity, the company’s beta is 1.85 the expected return on themarket is 12% and the risk-free rate is 7%. Use this information tocompute the company’s WACC and then use the WACC as the requiredreturn for this project. Please complete the following tables todetermine the NPV for Fairways Driving Range, Inc.’s proposedSanford venture. PLEASE ROUND ALL FIGURES TO THE NEAREST WHOLEDOLLAR!
For each year of the project, compute the profit margin andEPS (assuming that the firm has 16,000 shares of stockoutstanding). Besides the net value of the fixed assets, thecompany also expects to have $20,000 of other assets. Compute thetotal assets for each year, use the 40%/60% ratio to determine thetotal amounts of liability and equity for each year, and use thosefigures to compute ROA and ROE for each year. Based on yourfinancial analysis, prepare a paragraph or so of a summary from thestand point of a consultant. In this summary, provide your ideasabout this project and what you think would be the best course ofaction for the company to follow and why. Remember to justify youranswers with facts from your calculations as well as providemeaningful insight for the company.
0*
1
2
3
4
5
6
Sales
Variable Costs
Fixed Costs
Depreciation
EBIT
Taxes
Net Income
EBIT
Depreciation
Taxes
OCF
Net Capital Spending
Cash Flow From Assets
Present Value
NPV (just put overall NPV in Year 0 column)
Profit Margin
EPS
Total Assets
Total Liabilities
Total Equity
ROA
ROE
WACC Computation:
*The only amounts that you will have for year 0 will be NetCapital Spending, Cash Flow from Assets, Present Value and theoverall NPV.

Answer & Explanation Solved by verified expert

3.6 Ratings (401 Votes)

We will first calculate the WACC and then prepare the table Computation of WACC Proportion of debt in capital structure Wd 40 Proportion of equity in capital structure We 60 Pre tax cost of debt Kd bonds yield 55 Tax rate T 35 Beta 185 the expected return on the market Rm 12 and the riskfree rate Rf 7 Hence cost of equity Ke Rf Beta x Rm Rf 7 185 x 12 7 1625 WACC Wd x Kd x 1 T We x Ke 40 x 55 x 1 35 60 x 1625 1118 Net capital spending Purchase cost 103000 in year 0 Post See Answer

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Transcribed Image Text

The following information pertains to Fairways Driving Range,Inc.:The company is considering operating a new driving rangefacility in Sanford, FL. In order to do so, they will need topurchase a ball dispensing machine, a ball pick-up vehicle and atractor and accessories for a total cost of $103,000. All of thisdepreciable equipment will be 5-year MACRS property. The project isexpected to operate for 6 years, at the end of which the equipmentwill be sold for 25% of its original cost. Fairways expects to have$33,000 of fixed costs each year other than depreciation. Thesefixed costs include the cost of leasing the land for the drivingrange. Fairways expects to have sales for the first year of$103,000 based on renting 20,600 buckets of balls @ $5 per bucket.For years 2-6, they expect the number of buckets rented to steadilyincrease by 1,100 buckets per year, while the price will remainconstant @ $4. Expenditures needed for buckets and balls each yearare expected to be 23% of the gross revenues for the year. Fairwayswill be in the 35% tax bracket for all years in question.The company has a required capital structure of 40% debt and60% equity. They can issue new bonds to yield 5.5%. With respect toequity, the company’s beta is 1.85 the expected return on themarket is 12% and the risk-free rate is 7%. Use this information tocompute the company’s WACC and then use the WACC as the requiredreturn for this project. Please complete the following tables todetermine the NPV for Fairways Driving Range, Inc.’s proposedSanford venture. PLEASE ROUND ALL FIGURES TO THE NEAREST WHOLEDOLLAR!For each year of the project, compute the profit margin andEPS (assuming that the firm has 16,000 shares of stockoutstanding). Besides the net value of the fixed assets, thecompany also expects to have $20,000 of other assets. Compute thetotal assets for each year, use the 40%/60% ratio to determine thetotal amounts of liability and equity for each year, and use thosefigures to compute ROA and ROE for each year. Based on yourfinancial analysis, prepare a paragraph or so of a summary from thestand point of a consultant. In this summary, provide your ideasabout this project and what you think would be the best course ofaction for the company to follow and why. Remember to justify youranswers with facts from your calculations as well as providemeaningful insight for the company.0*123456SalesVariable CostsFixed CostsDepreciationEBITTaxesNet IncomeEBITDepreciationTaxesOCFNet Capital SpendingCash Flow From AssetsPresent ValueNPV (just put overall NPV in Year 0 column)Profit MarginEPSTotal AssetsTotal LiabilitiesTotal EquityROAROEWACC Computation:*The only amounts that you will have for year 0 will be NetCapital Spending, Cash Flow from Assets, Present Value and theoverall NPV.