Reference no: EM131057984

Kokomochi plans to spend $5 million on advertising compaign this year. The ads are expected to boost sales of the Mini Mochi Munch by $12 million this year and by $8 million next year. In addition, sales of other products are expected to rise by $2 million each year. The gross profit margin for the Mini Mochi and all other products is 25%. The marginal coporate tax rate is 40% in each year. 1- Calculate the incremental earnings associated with the advertising campaign? 2- Suppose Kokomochi has no depreciation, nor capital expenditures in the advertising compaign project. Its net working capital increases by $1 million this year, but decreases by $1 million next year. Calculate the free cash flows for the advertising campaing. 3-Kokomochi is a firm with 50% debt and 50% equity. The interest rate on its debt is 10%, and the coporate income tax rate is 40%. The expected rate of return on itts equity is 14%. Calculate Kokomochi's WACC 4- Suppose the advertising campaign is an average risk project. Calculate its NPV. sould we take the advertising campaign or not based on the NPV rule for a single project? Could you answer and explain the answers of the question above? Comment Expert Answer Anonymous Anonymous answered this 2 hours later Was this answer helpful? 0 0 299 answers Kokomochi plans Incremental Earnings Year 1 Year 2 Sales of minimochi munch $ 12,000,000.00 $ 8,000,000.00 Other Sales $ 2,000,000.00 $ 2,000,000.00 Cost of goods sold $ 10,500,000.00 $ 7,500,000.00 Gross Profit $ 3,500,000.00 $ 2,500,000.00 (a) Selling and administerative Expenses $ 5,000,000.00 $ - Earnings before interest and tax $ (1,500,000.00) $ 2,500,000.00 Income Tax $ 600,000.00 $ (1,000,000.00) Unleavered Net Income $ (900,000.00) $ 3,500,000.00 (b) Unleavered Net Income $ (900,000.00) $ 3,500,000.00 Add: Depreciation $ - $ - Less: Capital Expenditure $ - $ - Less: Increase in working capital $ 1,000.00 $ (1,000.00) Free Cash Flow $ (901,000.00) $ 3,501,000.00 © Debt 50% Equity 50% Interest rate on debt 10% Return on equity 14% Income tax rate 40% WACC Source Weight Cost of capital Weighted cost of capital Equity 0.5 0.14 0.07 Debt 0.5 0.06 0.03 WACC 0.1 (d) NPV Cash outflw $ 5,000,000.00 Less: Cash Inflow $ 2,600,000.00 NPV $ 2,400,000.00 NPV s positive so we can take advertisement compaign. Could you explain how to get the numbers from the beginning to the end?