the investment proposals

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proposal are included below. Mr. Stark
wants you to recommend if CHI
should invest in one, both, or none of
the investment proposals.
Required Return
Mr. Stark wants you to use the
weighted average bond yield for your
required return. The total market
value of debt CHI is expected to have
going into this investment is $3.5B,
which includes the additional $1.5B to
be taken on that is not included in the
current financial statements. The
current outstanding debt has an
interest rate of 5%, while the new
debt’s interest rate is now expected to
be lower at 3%. All of the $3.5B in
debt is in the form of bonds. Ignore
income tax effects when calculating
the required return (i.e., do not take
the after-tax cost of debt). Use
current interest rates as a proxy for
bond yield
Investment in Manufacturing &
Distribution
2
Mr. Stark has decided that rather than
purchase a distribution company, CHI
will expand one of its current
manufacturing facilities to help meet
the growing sports apparel demand in
Canada, including the delivery of
these products to the existing store
network.
The manufacturing facility currently
operates at capacity, manufacturing
400,000 products annually that are
ultimately sold in CHI stores within
the fiscal year. The facility was
purchased for $7,000,000 ten years
ago. With the expansion, CHI will
have the ability to double the amount
of products it can produce. The
company expects to increase
production by 75% in the

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