(10 pts) Tax and Grizzly Bear Company
Grizzly Bear – 8 pts
- A project requires an initial investment of $200,000 and is expected to produce additional sales revenue of $100,000 per year, which thereafter should grow at the rate of 2%, the expected annual price increases. Costs of goods sold are estimated at 78% of sales. Calculate the cashflows through year 5 and then assume the project life is indefinite.
- The project will require additional working capital of 10% of sales. As working capital ramps up, charge ½ of the year 1 value (5% of sales) in Year 0 and then apply the additional amount required each year. Simply apply the same growth rate as a use of cash in any terminal value calculation
- Grizzly Bear’s public debt trades at 6% and they estimate their cost of equity at 16%, the debt/equity composition is 30/70
- Grizzly Bear pays corporate taxes at a rate of 21% and – under the new tax law – accelerated depreciation allows the depreciation of initial investment for tax purposes in the first year
- Grizzly Bear expects no salvage value
- Calculate cashflows out to year 5, and then make an assumption for the terminal value.
- 1pt for all cash flows related to sales, CofCG, depreciation, and tax being correct.
- 1pt for terminal value, fill cell with yellow paint
- 1pt for correct WC calcs
- 1 pt for CoC, Fill cell with yellow paint
- 1 pt for NPV, fill cell with yellow paint
- 1 pt for IRR, fill cell with yellow paint
- If cost of goods sold can be reduced to 76% of sales, is the project viable? (Do this in a way that doesn’t erase your answers above)
- What is the new NPV? (1 pt. fill cell with yellow paint), would you make the investment? (1 pt)
What is the conflict over Amazon’s taxes? Who is right? (1pt)
Does EY think the Worldwide or Territorial tax approach aligns the US with other nation’s tax schemes? (1pt)
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