1. Dell decides that it is time for it to enter the tablet PC market.

It decides to introduce its first touch screen tablet. The tablet will cost US$ 300 per tablet (this is retail price. Dell will sell the tablet to Retailers at $240 per tablet. Based on its supplier contacts Dell knows that it can get the tablets made in China for a cost of $100 per tablet. Dell decides it will develop its tablet around open-source Andriod platform and it will have to retain 30 developers at $500,000 per developer to develop the software platform for the app. This will be an upfront cost. Dell will also bear US$ 30,000,000 in Engineering and Design costs for the project at the start of project. Dell will also require a Quality Assurance facility which will cost $ 5,000,000 per annum. It will also retain 10 developers @ US$ 200,000 per developer per annum for the life of the project for platform modifications and upgrades. Dell estimates that it will need to spend $ 10,000,000 each year on advertising for the project. It will also use its existing warehouse for shipment of stores. The warehouse infrastructure is billed at $10,000,000 each year rent. The phones are likely to take 5% of warehouse space. The total depreciation of warehouse infrastructure is $ 1,000,000 per annum. Dell estimates that it will sell 2,500,000 units in first year, 4,000,000 units in second year and 4,000,000 units in third year. In 4th year, which is anticipated to be the last year of the project, Dell will sell 2,000,000 units. Dell finds out that its total business cycle will be of 10 days (i.e. NWC/Revenue = 10/365). a) Prepare projected income statement and cash flow statement. (Assume tax rate of 40%). b) Dells pre-tax cost of debt is 7% while its cost of equity is 12%. If its capital structure comprises 40% debt and remaining equity, what is Dells WACC? c) What is NPV of the project? d) If there was product cannibalism to some of Dells existing product, will the NPV be more or less? e) If Dell has beta of 1.05, risk-free rate of 1% and markets expected return of 5%. What will be Dells cost of equity and WACC? f) Calculate sensitivity for 10% increase and decrease in revenue. g) Calculate sensitivity for 10% increase and decrease in cost of manufacturing. h) Calculate sensitivity for 50% increase and decrease in marketing expense. i) For WACC calculated in section(e), calculate sensitivity for 50 basis point (0.5%) increase and decrease in risk-free rate. j) If this project doesnt end in year 4 but continues at a perpetual growth rate of 5%, what will be NPV?

2. You are about to open a retail outlet in Lahore. You estimate that in first year you will have 1000 customers visiting you each week with each customer spending on average PKR 2,000. You also estimate that your Operational expenses for first year will be PKR 500,000/month for first year and they will increase by inflation each year. You find out that your COGS will be 80% of your revenue and your numbers of days of operation will be appox 1 week (refer to question 1 for explanation). You estimate that you will have to spend PKR 10,000,000 on buying the shop and further PKR 5,000,000 on renovation in the beginning. You also expect a marketing budget of PKR 60,000/month for marketing in year 1 which will increase by same ratio with revenue in subsequent years. You will also spend PKR 100,000 on company registration and trademark registration and PKR 100,000 on logo design at the start of the business. Tax rate is 35%. Your bank guarantees you a loan @ 16% which comprises 40% of your total capital. Your remaining 60% of capital will be your own equity. For a business like this, the cost of equity of comparable businesses is 20%. You expect your depreciation to be 10% of your fixed assets and your CAPEX each year to be equal to depreciation. You expect your revenue to grow by 30% in year 2, 40% in year 3, 30% in year 4, 15% in year 5, and 10% in year 6 and then stabilize @ 10% growth. a) b) c) d) Prepare projected Income Statement and Cash Flow Statement. Whats WACC? What is NPV of Business? What will NPV be if WACC increases or decreases by 10% of its original value (means if WACC is 20%, +10% would mean 22% and -10% would mean 18%) e) If total initial loan of business is PKR 80,000,000, what is business value of equity? f) If business has 100,000 shares issued, what is the price of each share. g) What will NPV be if business grew by +/-10% of base growth in each of first five years and during terminal year? h) What will NPV be if COGS was 90% to 70% of revenue?