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17 Apr
2020

DCF Project and Company Analysis

SOLUTION AT Australian Expert Writers

Course Project
SleepBetter Inc.
DCF Project and Company Analysis
Due time: 4/24  5:00PM
Instructions:
 
Your final report should include a complete set of tables, numerical and written answers to each
part of the assigned questions. Show your computation steps. Your written report for this project
should not exceed 10 pages. There is no minimum page requirement as long as you answer all
questions properly. Check the syllabus for more details about project.
 
If necessary, you can choose to provide additional evidence such as supporting excel calculations,
regressions, additional tables or data. Note that additional evidence is not required.  You can use excel to do data analysis.
 
 
Additional Requirements
 
In conducting the analysis and preparing your report, you may use any sources you find helpful:
textbook, public documents, data from various websites, and etc. However, the work you submit
must be our oZn in the sense that it represents our or our team¶s oZn snthesis and analsis
of information gathered from multiple sources and is written in your own words. Be sure to
carefully document all your sources, calculations, and assumptions. 
 
Moreover, you should perform your own data analysis and estimations, rather than copying
from other available analyst’s report (such as beta, cost of capital, etc).  
 
Failure to follow any of the above requirements can result in serious consequence and even a
fail of the project or the course.
 
Additional important project Policies and Template will be posted on blackboard. It is your
responsibility to read and comply with these policies.
1
SleepBetter is an American company located in Kirkland, WA. The company specializes in selling
sheets, pillowcases and comforter when it was founded in 1931. Over the years, the company still
maintains its main business, which accounts for about 50 percent of its total revenue. In 1990, the
company entered into the business of manufacturing mattresses due to stiff competitions. You and
your team, the Carson College of Business graduates, are hired by the company’s finance
department to evaluate a new project for the company.
SleepBetter’s only mattress type so far is a traditional inner spring called the Beautyrest, and sales
have been excellent. SleepBetter’s main competitor in the mattresses market is TEMPUR-SEALY
International, Inc (TPX). SleepBetter’s Beautyrest is similar to the TEMPUR-Adapt but is
relatively cheaper. This year, however, SleepBetter wants to incorporate a new high-end gel-
infused memory foam mattresses, the Kingsdown into their lineup. SleepBetter spent $13,950,000
to develop the new Kingsdown which features extreme comfort, pressure relief, better breathability
and air circulation than the existing Beautyrest. The company has spent a further $550,000 for a
marketing study to determine the expected sales figures for the new mattresses.
SleepBetter can manufacture the new mattresses for $2,800 per mattress in variable costs. Fixed
costs for the operation are estimated to run $30 million per year. The estimated sales volume is
90,870, 96,437, 94,700, 95,432 and 96,000 mattresses per year for the next five years, respectively.
The unit price of the new mattress will be $4,499. The necessary equipment can be purchased for
$460 million and will be depreciated on a five-year MACRS schedule. It is believed the value of
the equipment in five years will be $300 million.
As previously stated, SleepBetter currently manufactures the Beautyrest. Production of the existing
product is expecting to be terminated in three years. If SleepBetter does not introduce the new
luxury Kingsdown product, sales of the existing product will be 90,000, 89,732 and 88,679
mattresses per year for the next three years, respectively. The price of the existing mattress is
$3,000 per mattress, with variable costs of $1,350 each and fixed costs of $28 million per year. If
SleepBetter does introduce the new mattress, sales of the existing one will fall by 6,000 mattresses
per year, and the price of the existing mattresses will have to be lowered to $2,799 each mattress.
Net working capital for the project will be 20 percent of sales and will occur with the timing of the
cash flows for the year; for example, there is no initial outlay for NWC, but changes in NWC will
first occur in Year 1 with the first year’s sales. SleepBetter has a 35 percent corporate tax rate. The
company has a target debt to equity ratio of .6 and is currently BB- rated (according to S&P 500
ratings).
The finance department of the company has asked your team to prepare a report to Robert, the
company’s CEO, and the report should answer the following questions.
2
QUESTIONS  
Can you and your team prepare the income statement and the total cash flow (CFFA) table for
this new project? Please use these tables to help explain to Robert the relevant incremental
cash flows of this project?
The company’s CEO, Robert, wants to understand the risk of the mattress industry better. Since
SleepBetter’s main competitor, TEMPUR-SEALY (TPX), is a leading company in this
industry, Robert ask you to perform the following analysis on TPX.
Using the past N years of data (ending at 2019) to estimate your own beta and alpha of
TPX based on a regression analysis. Document data sources used. Also explain how long
a time period (from which year to which year) that you decide to use to perform your
estimation, and explain why?
Provide your beta and alpha estimates, as well as the statistical significance (e.g. t ratio,
p-value). Comment briefly.
Plot the security characteristic line for this company. Clearly show alpha and beta on the
diagram.  Is the company correctly priced, overpriced or underpriced?
From the above analysis, can you explain to Robert the risk characteristics of TPX and
the mattress industry using the beta you estimated?
Robert are also interested in the cost of capital of the mattress industry. Therefore, he asks you
to find the cost of equity, the cost of debt, and the WACC of TPX. Please show your
computational steps clearly and document data sources used and any assumptions you make.
According to the recent estimation of SleepBetter’s finance department, the overall cost of
capital of SleepBetter Inc. is 9%. Can you compute the NPV and IRR of the company’s new
project? Please show your computation steps clearly (show your inputs if using financial
calculator or excel sheet).
Should Robert take the new project? Why or why not (Please explain using the NPV and IRR
rules separately)?
Robert wants to know whether his company’s current capital structure is optimal. Please give
your opinion and explain briefly using one of the capital structure theories you learned.
If SleepBetter’s current capital structure is not optimal in your opinion, how should
the company move toward a more appropriate capital structure?
***** END *****
3

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