Laurentian Bakeries Case Study

Read the case study ‘Laurentian Bakeries’ and answer the following questions:

(i) What are the key items to keep in mind when determining the free cash flows for

investment analysis?

(ii) Calculate the weighted average cost of capital (WACC) for Laurentian Bakeries.

How does the capital structure of a firm/project affect the WACC?

(iii) Produce a projected capital budgeting free cash flow statement for the expansion

of the company’s frozen pizza plant in Winnipeg. You can make the following

assumptions: the project will have a life of 10 years, the corporate tax rate will stay at

38.5% per annum throughout the life of the project, inflation rate will be 4% per annum

and there will be no salvage value at the end of the life of the project.

Using your free cash flow statement, calculate the NPV, Payback, and IRR of the

project.

(iv) Without making any calculations, identify and discuss the benefits and risks of

making the investment (i.e. expansion of the frozen pizza plant).

(v) As Danielle Knowles, what recommendation would you make concerning the

Winnipeg plant expansion, and why?