You are the executive officers of big buns inc bbi bbi

Assignment Help Corporate Finance

Reference no: EM13382124

You are the executive officers of Big Buns, Inc. (BBI). BBI manufactures different types of chairs and accessories. You have had several good years and have decided to expand. BBI is looking at acquiring another company as a subsidiary.

As executives (financially savvy and adept in capital budgeting procedures :-)) you have narrowed your choices to two possible acquisitions; Hineys R Us, a seat cushion manufacturer, and Flaberific, a heavy duty lawn chair manufacturer. You only have $500,000 to spend, which happens to be the price tag for each of the companies.

It is your job to determine which company you should acquire. BBI's cost of capital is 10%.

The raw data for each company is as follows: Hineys R Us (HRU) ----------------- HRU is projected to sell 50,000 units (seat cushions) in year one at a retail price of $15 per unit with an increase of 30% per year. Variable costs consist of Cost of goods sold, estimated at 25% of sales; advertising, estimated at 10% of sales; other variable costs, estimated at 5% of sales.

Fixed costs consist of labor for year one estimated at $200,000 with an increase of 10% per year; rent for year one estimated at $60,000 with an increase of 5% per year; depreciation estimated at $10,000 per year; and other fixed costs for year one estimated at $5,000 with an increase of 5% per year. HRU's tax rate is estimated at 30%.

You also project that you will have to spend an additional $20,000 in year 2 and $50,000 in year 5 in capital expenditures. To be conservative you are using a discount rate 2 points above BBI's cost of capital. Flaberific (FLB) ---------------- FLB is projected to sell 40,000 units (lawn chairs) in year one at a retail price of $25 per unit with an increase of 30% per year.

Variable costs consist of Cost of goods sold, estimated at 30% of sales; advertising, estimated at 15% of sales; other variable costs, estimated at 5% of sales. Fixed costs consist of labor for year one estimated at $250,000 with an increase of 10% per year; rent for year one estimated at $80,000 with an increase of 5% per year; depreciation estimated at $20,000 per year; and other fixed costs for year one estimated at $5,000 with an increase of 5% per year. FLB's tax rate is estimated at 30%. You also project that you will have to spend an additional $75,000 in year 2 and $175,000 in year 5 in capital expenditures.

You consider FLB to be slightly more risky than HRU so you will use a discount rate 3 points above BBI's cost of capital.

1) A 5 year projected Income Statement.

2) A 5 year projected Cash Flow.

3) Net Present Value

4) Internal Rate of Return

5) Payback Period

6) Profitability Index

7) Discounted Payback

8) Modified Internal rate of Return

9) Breakeven for year 1

10) Based on items 1 through 7, which company should BBI acquire?

Reference no: EM13382124

Questions Cloud

Historically high return stocks have exhibited lower risk : historically high return stocks have exhibited lower risk than low return stocks?.just the opposite what the sml

1the corporate treasurer of ajax company expects the : 1the corporate treasurer of ajax company expects the company to grow at 4 in the future and debt securitiesat 6

You have been reading about the madison computer company : you have been reading about the madison computer company mcc which currently retains 90 percent of its earnings 5 a

1 the stock of trudeau corporation went from 27 to 45 last : 1 the stock of trudeau corporation went from 27 to 45 last year. the firm also paid 2 in dividends during the year.

You are the executive officers of big buns inc bbi bbi : you are the executive officers of big buns inc. bbi. bbi manufactures different types of chairs and accessories. you

The imperial sugar company located in honolulu hawaii has : the imperial sugar company located in honolulu hawaii has determined that by implementing a new policy in its credit

Your taskgather datain this exercise you will be using the : your taskgather data.in this exercise you will be using the monthly return data that you calculated for your stock and

The company was considering a 1 for 1 bonus issue on the : the company was considering a 1 for 1 bonus issue. on the day of record the market price of its shares was 20 yuan. one

How the fed should respond to prevailing conditionsconsider : how the fed should respond to prevailing conditions.consider the existing economic conditions including inflation and

User Account

All Pages