University of the West Indies

Mona School of Business & Management

Master of Science – Corporate Finance
SBRM 6020 Corporate Finance

INSTRUCTIONS
▪ Kindly read the case exercises below in conjunction with the company’s most recent annual
report, audited financial statement and/or any other relevant source of information. Prepare
the respective excel models (using MS Excel workbook) and memos (using MS Word).
▪ The assignment is due the last teaching date of the semester at mid-night! Submission will
be electronic.
▪ State all relevant assumptions made.
▪ The cases are based on local companies listed on the Jamaica Stock Exchange and as such all
economic and legislative variables (e.g. taxes, inflation, risk-free rates) and assumptions must
be consistent with the country. Recall to state all references.
▪ Treat each question as independent unless otherwise stated.
▪ See ‘Excel Modeling’ and ‘Excel Skills’ on the E-learning site for the instructions on
developing the models.
▪ This is an individual assignment.

Please see table below with the company’s respective beta as at Monday September 17, 2018 at 4:27
PM1
Company Beta
Honey Bun (HONBUN) 1.211
Jamaica Broilers Group (JBG) 0.763

1
Retrieved from Bloomberg Terminal 17-Sept-2018
 CAPITAL BUDGETING: NPV, PAYBACK, IRR & PI

Honey Bun’s management is currently evaluating a new product, Honey Bulla. A test
marketing program carried out in 2016 at a cost of US$150,000 showed enthusiastic
acceptance for the product, which would cost more than the regular Goldie and Honey
Bun but offer 25% fewer calories and had more appeal to the Heart Foundation of
Jamaica. You were engaged and retained by a firm as financial analysts to analyze this
project and present the findings to the company’s executive committee.

Production facilities for the Honey Bulla product would be set up in an unused section of Honey
Bun’s Retirement Crescent plant. The machinery with an estimated cost of US$350,000 would be
purchased, but shipping costs to move the machinery to Honey Bun plant would add another
US$10,000, and installation charges would amount to another US$15,000. Further, Honey Bun’s
inventories (raw materials, work-in-process, and finished goods) would have to be increased by
US$15,000 at the time of the initial investment. Twenty percent (20%) of this would be recoverable
at the end of the project. If the machinery is purchased, it would have an economic life of 4 years. The
machinery is expected to have a salvage value of US$40,000 after 4 years of use.

Honey Bun’s management expects to sell 400,000 16-ounce cartons of the new product in each of the
next 4 years. The price is expected to be US$2.00 per carton. Fixed costs are estimated to be
US$100,000, and variable cash operating costs are estimated at US$1.25 per unit. Note that operating
costs are a function of the number of units sold rather than unit price, so unit price changes have no
direct effect on operating costs.

In examining the sales figures, a team member of yours, Adam, noted a short memo from Honey
Bun’s Marketing Executive, Janelle, which expressed concern that the Honey Bulla project would cut
into the firm’s sales of the regular Honey Buns. Specifically, the Marketing Executive estimated that
regular Honey Bun sales would fall by five percent (5%) if Honey Bulla were introduced. Adam
pursued this further with both the sales and production managers, and they estimated that the new
project would probably lower the firm’s regular Honey Bun sales by $40,000 per year. However, this
volume reduction would also reduce regular Honey Bun production costs by $20,000 per year on a
pretax basis.
 Required:
Financial Excel Model:
1. Calculate Honey Bun’s overall Weighted Average Cost of Capital (WACC)? Assume
that this WACC is the appropriate discount/hurdle rate.
2. Prepare a spreadsheet showing the operating after tax cash flows, terminal cash flow
and total project cash flows. Estimate the product’s operating cash flows inclusive of
cannibalization effects. What is the project’s NPV, PI, IRR, and Payback Period?
3. Prepare a Sensitivity Analysis of the variable(s) and/or value driver(s), you deem to be
KEY to the outcome of the project (i.e. prepare the base case, then sensitivities on
how the results from the base case could change if certain key variables change from
the values used in the base case). Graphical illustrations of the sensitivities will enhance
your submission.

Memo:

1. Two-page memo (do not exceed, bullet format is accepted) to management, setting out your
findings, and make a recommendation to accept, reject, or defer the project. Discussions
should include the justifications for your recommendation and a summary of other factors
that should be considered and information that may be needed prior to making a final decision.
 STOCK VALUATION: DIVIDEND DISCOUNT MODEL (DDM)

Peruse and evaluate Jamaica Broilers Group (JBG) most recent published audited
financial statements and/or annual report. Determine the annual dividend per share
that was paid to shareholders. Once this dividend amount is obtained, assume the
following growth rates for the next four (4) years: 4% (from the current year), 4%,
4.25%, 3% and then 2.8% each year forever.
The terminal growth rate of 2.8% was based on professional judgment taking into consideration the
projected growth rate in GDP for Jamaica.
(i.e. g = expected growth rate into perpetuity)

Required:
Financial Excel Model:
1. Calculate JBG’s overall Weighted Average Cost of Capital (WACC)? Assume that this
WACC is the appropriate discount/hurdle rate.
2. What is the value of JBG’s stock?
Memo:
1. One-page memo (do not exceed, bullet format is accepted) including a comparison of your
valuation to the current market price. Discuss whether you believe the stock is over/under
valued and if you would recommend the purchase and/or sale of said stock.