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strawberry, chocolate, and mint chocolate. The new sales of wild berry
are projected as follows:
The expected sales will come from both new customers and current
customers who switch flavors. The current projected sales for the existing
flavors (assuming no introduction of the new flavor) are
Projected Sales
However, if the company introduces wild berry, it will cut into the sales of
the original flavors based on the following estimates:
Percentage of Sales Erosion
Here are the revenue and cost per unit of ice cream for Ice Cream City:
Vanilla: current revenue of $3.05 per unit and cost of $1.22 per unit
French vanilla: current revenue of $3.15 per unit and cost of $1.38 per
unit
Strawberry: current revenue of $3.25 per unit and cost of $1.41 per unit
Chocolate: current revenue of $3.25 per unit and cost of $1.57 per unit
Mint chocolate: current revenue of $3.25 per unit and cost of $1.63 per
unit
Wild berry: projected revenue of $3.25 per unit and cost of $1.44 per unit
Find the annual erosion of revenue, the cost savings, and the net cash flow
with the new ice cream.
Ch 11 Advanced problem 1
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Changing WACC and optimal choice. Austin Enterprises is currently an
all-equity firm. The firm is considering selling debt (bonds) and retiring
some of the equity. However, at each level of debt, debt becomes
more expensive (cost of debt is rising), and the riskiness of the equity also
rises with more and more debt. Using a spreadsheet, determine the best
combination of debt and equity for Austin Enterprises if
The current beta of Austin Enterprises is 0.85.
The current market return is 12%.
The current risk-free rate is 3%.
The total equity is 20,000,000 shares at $25 per share.
Debt is sold in units of $2,000,000.
The first unit of debt has a cost of 7.5%.