Submitted by: Submitted by smiles6969
Views: 123
Words: 352
Pages: 2
Category: Business and Industry
Date Submitted: 11/06/2013 11:00 PM
Capital Investment 18,000,000 a) WACC = (D/V)(Kb)(1-tax)+(E/V)(Ke) f) PV
Revenue 3,500,000 8.776 = (.40/1)(.06)(1-0.35)+(.6/1)ke Investment (18,000,000) (18,000,000)
Expenses 800,000 Ke = 12.03% Working Capital (1,200,000) (1,200,000)
Salvage Value 3,000,000 Investment Tax Credit 1,000,000 2,780,366 2,780,366
CCA Rate 30% b) E(Ri) = Rf+B(E(Rm)-Rf) Recovery of Working Capital 1,200,000 612,233 612,233
Corporate Tax Rate 35% 0.1203 = 0.04+B(0.07) Cash Flow:
Tax Credit 1,000,000 B = 1.146666667 Revenue 3,500,000
Net Working Capital 1,200,000 Expenses 800,000
WACC 8.776% c) B = Bu+Bu((D/E)(1-Tax)) Income Tax 35%
Risk Free Rate 4% 1.1467 = Bu+Bu((0.40/0.60)(1-0.35)) Net Income 1,755,000 9,795,004 9,795,004
MRP 7% Bu = 0.8000 Salvage 3,000,000 1,209,344 1,209,344
Usual Debt 40% CCA Investment Tax Shield 4,677,527 4,677,527
Usual Equity 60% d) B = Bu+Bu((D/E)(1-Tax)) CCA Lost Salvage Tax Shield (414,460) (414,460)
Initial Debt 75% B = 0.8+0.8((.75/.25)(1-.35)) Underwriting Cost 270,000 270,000 270,000
Initial Equity 25% B = 2.36 Tax Shield on VC 18,900 84,376 84,376
Effective annual rate 6% NPV (185,609)
Debt Principal 2% e) i E(R) = 0.04+2.36(0.07)
E(R) = 0.2052 As the NPV is negative the project should be rejected
WACC = (0.75)(0.06)(1-0.35)+(0.25)(0.2052)
WACC = 0.08055
Debt = 0.06*(1-0.35)
Debt = 0.039
ii E(R) = 0.04+(0.8)(0.07)
E(R) = 0.096
Debt = 0.06*(1-0.35)
Debt = 0.039
iii E(R) = 0.04+2.36(0.07)
E(R) = 0.2052
Debt = 0.06*(1-0.35)
Debt = 0.039