This spreadsheet supports INSTRUCTOR analysis of the case “Worldwide Paper Company” (UVA-F-1372).

This spreadsheet was prepared by Kenneth M. Eades, Professor of Business Administration. Copyright © 2007 by the University of Virginia Darden School Foundation, Charlottesville,
VA. All rights reserved. For customer service inquiries, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a retrieval
system, posted to the Internet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.

Rev. Oct 14, 2016

 Exhibit 1
Worldwide Paper Company
Cost-of-Capital Information

Interest Rates: January 15, 2016

Bank loan rates (LIBOR) Market risk premium

1-year 1.15% Historical average 6.0%

Government bonds Corporate bonds (10-year maturities):

1-year 0.49% Aaa 2.45%
5-year 1.46% Aa 3.38%
10-year 2.04% A 3.85%
30-year 2.82% Baa 5.05%

Worldwide Paper Financial Data

Balance-sheet accounts (in millions of dollars)

Bank loan payable (LIBOR + 500
Long-term debt 2,500
Common equity 500
Retained earnings 2,000

Per-share data
Shares outstanding (millions) 500
Book value per share $5.00
Recent market value per sha $24.00

Other data
Bond rating A
Beta 1.10

Source: Datastream
 Exhibit TN2
Worldwide Paper Company
Weighted-Average Cost of Capital

Interest rates: January 15, 2016

Bank loan rates (LIBOR) Market risk premium

1-year 1.15% Historical average 6.0%

Government bonds: Corporate bonds (10-year)

1-year 0.49% Aaa 2.45%
5-year 1.46% Aa 3.38% Ken Eades:
10-year 2.04% A 3.85% A-rated yield from case
Exhibit 1. Ignore LIBOR
30-year 2.82% Baa 5.05% rate and use long-term for
all int-bearing debts.

Worldwide Paper (2016):

3,000 20.00% 3.85% 0.46%
Balance-sheet accounts (in millions of dollars): (Kd)
Current long-term debt 500
Long-term debt 2,500
Common equity 500
Retained earnings 2,000
Eades, Ken: Ke using
Per-share data: 12,000 80.00% 8.64% 6.91% CAPM with 10-year
Shares outstanding (in milli 500 (Ke) Treasury yield, 6.0%
market risk premium, and
Book value per share $5.00 15,000 7.37% beta of 1.10.
Recent market value per sh $24.00 WACC

Other:
Bond rating: A
Beta: 1.10
Tax rate: 40%

Source: Created by author.

 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

Adjustment for Inflation ==> 0.000% {Exhibit TN1 displays “base case with inflation” = 0%. Exhibit TN3 displays cash fl

2016 2017 2018 2019 2020 2021 2022

Investment:
Capital Outlay 16,000 2,000 0 0 0 0 0
Net Working Capital (10% Sales) 0 400 600 0 0 0 0
Total Investment 16,000 2,400 600 0 0 0 0
Investment Recovery :
Equipment Salvage ($1,080)
Net Working Capital (full recovery) (1,000)

Earnings before Interest and Taxes (EBIT):

Sales Revenue 4,000 10,000 10,000 10,000 10,000 10,000
Cost of Goods Sold (75% Sales) 75% (3,000) (7,500) (7,500) (7,500) (7,500) (7,500)
SG&A (5% Sales) 5.0% (200) (500) (500) (500) (500) (500)
Operating Savings 2,000 3,500 3,500 3,500 3,500 3,500
Depreciation ($18,000/6) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000)
Total Costs & Expenses (4,200) (7,500) (7,500) (7,500) (7,500) (7,500)

EBIT (200) 2,500 2,500 2,500 2,500 2,500

- Taxes (40%) 80 (1,000) (1,000) (1,000) (1,000) (1,000)
NOPAT (120) 1,500 1,500 1,500 1,500 1,500
+ Depreciation 3,000 3,000 3,000 3,000 3,000 3,000
- Investment (16,000) (2,400) (600) 0 0 0 2,080
= Free Cash Flow ### 480 3,900 4,500 4,500 4,500 6,580

$2,297 = NPV @ 7.37%

11.1% = IRR

Source: Created by author.

 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

. Exhibit TN3 displays cash flows with inflation = 1.415%.}

Question 1: Provide a summary of the case in less than 100 words.

In this question, we try to test the ability of students in summarizing and understanding the case.

Note:
Please mark the answer based on the followings:
2 1. Ability to summarize and synthesize. Not just copy and paste from the case.
2 2. Writing skills including English, grammar, sentence structure, etc.
6 3. Highlighting the key points such as: Cost reduction, increasing revenue, new technology, manufacturin

10 Total marks
chnology, manufacturing/construction business, new project, decision making, investment, etc.
 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

Question 2: What yearly cash flows are relevant for this investment decision? Do not forget the effect of taxes and the initial inves

Adjustment for Inflation ==> 0.000% {Exhibit TN1 displays “base case with inflation” = 0%. Exhibit TN3 displays cash fl

2016 2017 2018 2019 2020 2021 2022

Investment:
Capital Outlay 16,000 2,000 0 0 0 0 0
Net Working Capital (10% Sales) 0 400 600 0 0 0 0 2
Total Investment 16,000 2,400 600 0 0 0 0
Investment Recovery :
Equipment Salvage ($1,080) 1
Net Working Capital (full recovery) (1,000) 1

Earnings before Interest and Taxes (EBIT):

Sales Revenue 4,000 10,000 10,000 10,000 10,000 10,000 -
Cost of Goods Sold (75% Sales) 75% (3,000) (7,500) (7,500) (7,500) (7,500) (7,500) 3.5
SG&A (5% Sales) 5.0% (200) (500) (500) (500) (500) (500) 3.5
Operating Savings 2,000 3,500 3,500 3,500 3,500 3,500
Depreciation ($18,000/6) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000) 3
Total Costs & Expenses (4,200) (7,500) (7,500) (7,500) (7,500) (7,500) 3

EBIT (200) 2,500 2,500 2,500 2,500 2,500 3

- Taxes (40%) 80 (1,000) (1,000) (1,000) (1,000) (1,000) 3
NOPAT (120) 1,500 1,500 1,500 1,500 1,500 3
+ Depreciation 3,000 3,000 3,000 3,000 3,000 3,000
- Investment (16,000) (2,400) (600) 0 0 0 2,080 2
= Free Cash Flow ### 480 3,900 4,500 4,500 4,500 6,580 7

35

Source: Created by author.

 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

of taxes and the initial investment amount.

. Exhibit TN3 displays cash flows with inflation = 1.415%.}

1 mark for year 2017 & 2018 only

If they have it embedded in total investment for 2022, the mark has to be added

One mark for 2017 and 2.5 mark for 2018-2022 (0.5 for each year)
One mark for 2017 and 2.5 mark for 2018-2022 (0.5 for each year)

0.5 mark for for each year

0.5 mark for for each year

0.5 mark for for each year (if they get EBIT right, meaning that they got total cost right, so even if total cost is not stated, the relevant mark (3) will be given, making the
0.5 mark for for each year
0.5 mark for for each year

0.5 mark for for each year with value

1 mark for for each year

Total Marks
 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

mark (3) will be given, making the total of 6 for total cost and EBIT)
Question 3: What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Be prepared to justify
your recommended rate and the assumptions that you used to estimate it.

Exhibit TN2
Worldwide Paper Company
Weighted-Average Cost of Capital

Interest rates: January 15, 2016

Bank loan rates (LIBOR) Market risk premium

1-year 1.15% Historical average 6.0%

Government bonds: Corporate bonds (10-year)

1-year 0.49% Aaa 2.45% Ken Eades:
A-rated yield from case
5-year 1.46% Aa 3.38% Exhibit 1. Ignore LIBOR
10-year 2.04% A 3.85% rate and use long-term for
all int-bearing debts.
30-year 2.82% Baa 5.05%

Worldwide Paper (2016):

3,000 20.00% 3.85% 0.46% 4 1 mark for total debt or percentag
Balance-sheet accounts (in millions of dollars): (Kd)
Current long-term debt 500 Eades, Ken: Ke using
CAPM with 10-year
Long-term debt 2,500
Treasury yield, 6.0%
Common equity 500 market risk premium, and
Retained earnings 2,000 beta of 1.10.

Per-share data: 12,000 80.00% 8.6400% 6.91% 7 1 mark for total equity or percenta
Shares outstanding (in milli 500 (Ke) * We accept if students take othe
Book value per share $5.00 15,000 7.37% 5
Recent market value per sh $24.00 WACC

Other:
Bond rating: A 5 Bonus marks if they choose 10-ye
Beta: 1.10 * Bruner et al. (1998): 70% use Tr
Tax rate: 40%
Source: Created by author. 16 Total Marks
5 Bonus Marks
21 Max Marks
justify

debt or percentage, 1 mark for taking rate for bond rating A, 2 mark for w*Kd*1-tax

equity or percentage, 4 marks for Ke, 2 mark for w*Ke

tudents take other government bond rates as Rf. Since it will affect other calculation, if a group selected other rates, simply modify the formula to get the right answer for other secti

they choose 10-year or 30-year government bond rate as risk-free rate.

1998): 70% use Treasury bond yields maturities of ten years or greater.
for other sections too.
 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

Question 4: What is the net present value (NPV) and internal rate of return (IRR) for the inve

Adjustment for Inflation ==> 0.000% {Exhibit TN1 displays “base case with inflation” = 0%. Exhibit TN3 displays cash fl

2016 2017 2018 2019 2020 2021 2022

Investment:
Capital Outlay 16,000 2,000 0 0 0 0 0
Net Working Capital (10% Sales) 0 400 600 0 0 0 0
Total Investment 16,000 2,400 600 0 0 0 0
Investment Recovery :
Equipment Salvage ($1,080)
Net Working Capital (full recovery) (1,000)

Earnings before Interest and Taxes (EBIT):

Sales Revenue 4,000 10,000 10,000 10,000 10,000 10,000
Cost of Goods Sold (75% Sales) 75% (3,000) (7,500) (7,500) (7,500) (7,500) (7,500)
SG&A (5% Sales) 5.0% (200) (500) (500) (500) (500) (500)
Operating Savings 2,000 3,500 3,500 3,500 3,500 3,500
Depreciation ($18,000/6) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000)
Total Costs & Expenses (4,200) (7,500) (7,500) (7,500) (7,500) (7,500)

EBIT (200) 2,500 2,500 2,500 2,500 2,500

- Taxes (40%) 80 (1,000) (1,000) (1,000) (1,000) (1,000)
NOPAT (120) 1,500 1,500 1,500 1,500 1,500
+ Depreciation 3,000 3,000 3,000 3,000 3,000 3,000
- Investment (16,000) (2,400) (600) 0 0 0 2,080
= Free Cash Flow ### 480 3,900 4,500 4,500 4,500 6,580

$2,297 = NPV @ 7.37% 6

11.07% = IRR 6

Source: Created by author. 12

 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

rn (IRR) for the investment?

. Exhibit TN3 displays cash flows with inflation = 1.415%.}

For final answer considering the WACC (please remember there might be different Ke). If a group did manual but wrong final answer, the discretion is yours to allocate

For final answer considering the WACC (please remember there might be different Ke). If a group did manual but wrong final answer, the discretion is yours to allocate

Total Marks
 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

the discretion is yours to allocate certain percentage of marks

the discretion is yours to allocate certain percentage of marks

 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

Question 5: If inflation rate were 2.5%, what would be the NPV and IRR?

Adjustment for Inflation ==> 2.500% {Exhibit TN1 displays “base case with inflation” = 0%. Exhibit TN3 displays cash fl

2016 2017 2018 2019 2020 2021 2022

Investment:
Capital Outlay 16,000 2,000 0 0 0 0 0
Net Working Capital (10% Sales) 0 400 625 26 26 27 28
Total Investment 16,000 2,400 625 26 26 27 28
Investment Recovery :
Equipment Salvage ($1,080)
Net Working Capital (full recovery) (1,131)

Earnings before Interest and Taxes (EBIT):

Sales Revenue 4,000 10,250 10,506 10,769 11,038 11,314 5
Cost of Goods Sold (75% Sales) 75% (3,000) (7,688) (7,880) (8,077) (8,279) (8,486) 2.5
SG&A (5% Sales) 5.0% (200) (513) (525) (538) (552) (566) 2.5
Operating Savings 2,000 3,588 3,677 3,769 3,863 3,960 5
Depreciation ($18,000/6) (3,000) (3,000) (3,000) (3,000) (3,000) (3,000)
Total Costs & Expenses (4,200) (7,613) (7,728) (7,846) (7,967) (8,091)

EBIT (200) 2,638 2,778 2,923 3,071 3,223 * we will not consider any
- Taxes (40%) 80 (1,055) (1,111) (1,169) (1,228) (1,289)
NOPAT (120) 1,583 1,667 1,754 1,843 1,934
+ Depreciation 3,000 3,000 3,000 3,000 3,000 3,000
- Investment (16,000) (2,400) (625) (26) (26) (27) 2,184
= Free Cash Flow ### 480 3,958 4,641 4,727 4,816 7,117

$3,204 = NPV @ 7.37% 6

12.41% = IRR 6

Source: Created by author.

27
WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

\ 100
 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

Exhibit TN3 displays cash flows with inflation = 1.415%.}

Note: Direct changes, if inflation exist, are highlighted in blue

while indirect changes are highlighted in gray

One mark for each year

0.5 mark for each year

0.5 mark for each year
One mark for each year

* we will not consider any mark for gray and while cells. If they get the right NPV and IRR, meaning that they did other parts right. Note agai

For final answer considering the WACC (please remember there might be different Ke). If a group did manual but wrong final answer, the discretion is yours to allocate

For final answer considering the WACC (please remember there might be different Ke). If a group did manual but wrong final answer, the discretion is yours to allocate

Total Marks
 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

Total Case Marks

 WORLDWIDE PAPER COMPANY
Woodyard Investment Analysis ($000)

r parts right. Note again the WACC.

discretion is yours to allocate certain percentage of marks

discretion is yours to allocate certain percentage of marks