530 Final Test

Problem #1

g = 5% After Year 3

Free Cash Flow of Year 4 = 40 *(1+g) = 42m

HV3 = FCF4/WACC-g = 42m/0.13 = 0.05 = 525m

Year3: 525+40 = 565m

Value-Operation =FCF11+WACC+FCF2(1+WACC)2+FCF3(1+WACC)3

=-151+0.13+10(1+0.13)2+565(1+0.13)3

=-13.27 + 7.83

=386.13m

Problem 2

EPS = 3 DPS = 2

Number of Shares = 500,000

Net Income = 3*500,000 =1,500,000

Dividends = 2 *500,000 = 1,000,000

Retained Earnings = 1,500,000-1,000,000 = 500,000

Since WS = 0

So Required Funds = 800,000 -500,000 = 300,000

Which means the company needs 300,000 debts

Wd = 300,000/800.000% = 37.5%

Problems 3

Value = $40,000, Loan Rate 10%, Tax Rate = 40%

WACC = Loan Rate *(1-Tax Rate) = 6%

Analysis of purchase |

Depreciation |

Year | 1 | 2 | 3 | 4 |

MACRS | 0.33 | 0.45 | 0.15 | 0.07 |

Depreciation | 13,200 | 18,000 | 6,000 | 2,800 |

Loan Payment | -12,619 | -12,619 | -12,619 | -12,619 |

Tax Saving on Depreciation | 5,280 | 7,200 | 2,400 | 1,120 |

Residual | | | | 10,000 |

Maintenance Cost | -1,000 | -1,000 | -1,000) | -1,000 |

Maintenance Tax Saving | 400 | 400 | 400 | 400 |

Tax on Residual sale | | | | -4,000 |

Cash Flow | -7939 | -6,019 | -1089 | -6,099 |

DCF | -7,489 | -5,357 | -9,084 | -4831 |

PV %6 | -26761 | | | |

Cost of Purchasing = 26761

Analysis of Lease |

| | | | |

Year | 1 | 2 | 3 | 4 |

Lease Payment | -10,000) | -10,000 | -10,000 | -10,000 |

Tax Saving on Lease | 6,000 | 6,000 | 6,000 | 6,000 |

DCF | -4,340 | -4,094 | -3,862 | -3,644 |

PV%6 | -15,939 | | | |

Cost of leasing = 15939

Since NPV of leasing is larger than NPV of buying, the firm should buy the truck. And

NAL = 26761 -15939

=10,822