Strategic Financial ManagementProject #1INSTRUCTIONS: PROJECT #1: Equity Instruments 1. You have been asked to estimate the cost of equity for Hadley Holdings, a firm with operations in three...

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Strategic Financial Management Project #1 INSTRUCTIONS: PROJECT #1: Equity Instruments 1. You have been asked to estimate the cost of equity for Hadley Holdings, a firm with operations in three different businesses – retailing, hotels, and travel. You have collected information on the firm’s operations and of comparable firms in each of the businesses. Comparable Firms Revenues Unlevered Beta Firm Value/Sales Retailing $400 Million 0.85 2.0 Software $400 Million 1.15 3.0 Travel $800 Million 1.35 1.25 a. Estimate the bottom-up unlevered beta for Hadley Holdings. ( 20 points) b. Hadley Holdings has no market-traded debt. The firm does, however, have $ 1.2 billion in book debt and an interest expense of $ 60 million. If the debt has an average maturity of 5 years, and the fair market rate for debt for the firm is 7%, estimate the market value of the debt. ( 20 points) c. Hadley Holdings has 100 million shares outstanding trading at $ 10 a share. In conjunction with the estimated market value of debt in (b), estimate the bottom-up levered beta for the firm. (You can assume a marginal tax rate of 40%.) ( 10 points) 2. Now assume that you have been asked to estimate the free cash flow to the firm last year for Hadley Holdings and have collected the following information. • The firm reported earnings before interest, taxes, depreciation, and amortization of $350 million on its revenues of $ 1600 million. • Depreciation and amortization charges amounted to $ 100 million and capital expenditures were $ 200 million. • Hadley spent $ 100 million last year on research and development in its software division, following R&D expenditures of $ 60 million (3 years ago), $ 75 million (2 years ago), and $ 90 million (1 year ago) in the prior three years. You believe that research expenditures have an amortizable life of 3 years. • The working capital items for the last year and the previous year are reported below. Last Year Year Before Last Cash $100 Million $80 Million Accounts Receivable $80 Million $90 Million Inventory $150 Million $100 Million Accounts Payable $130 Million $110 Million Short-Term Debt $150 Million $130 Million • The tax rate for the firm is 40%. a. Estimate the value of the research asset of the firm. ( 10 points) b. Estimate the operating income adjusted for R&D expenditures. (10 points) c. Estimate the free cash flows to the firm last year. ( 30 points) Answer all questions and show the necessary work. Please be brief. This is an open book and open notes exam