Adv Fin Assign 5

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