In: Accounting
Relevant Information on Company ABC and Project P (The New Show):
Additional Information on Company ABC and Project P (The New Show):
QUESTION: Find the NPV of this project today? (Find WACC using discount rate, CAPM for common shares and Dividend Discount Model for preferred shares when finding the cost of equity. When calculating cost of debt, use EAR, not YTM)
PLEASE SHOW ALL WORK AND STEP BY STEP CALCULATIONS!!!
Cost of Equity as per CAPM: |
As we are caculating the WACC, to discount the New Show project's cash flows, |
we will take the average betas of the three shows give, to be used in the CAPM formula, |
ie. (1.35+1.07+1.24)/3= |
1.22 |
so, as per CAPM, Cost of equity, ke=RFR(+Beta*(Market return-RFR)) |
ie.ke=1.8%+(1.22*(6.5%-1.8%))= |
7.53% |
Cost of preferred shares, |
kps=$ dividend/market price per share |
ie.2.5/25= |
10.00% |
EAR of bond(before-tax)= |
(1+Annual rate/2)^2-1 |
1+(9.5%/2))^2-1= |
9.7256% |
so, the |
after-tax EAR= |
Before-tax EAR*(1-Tax rate) |
ie.9.7256%*(1-42%)= |
5.64% |
Now, calculating the WACC |
Type of capital | Wt. to total | Cost | Wt.*Cost | ||
Equity | 14500000*21= | 304500000 | 71.34% | 7.53% | 5.37% |
Pref. | 1550000*25= | 38750000 | 9.08% | 10.00% | 0.91% |
Bond | 76000*1000*110/100= | 83600000 | 19.59% | 5.64% | 1.10% |
Total | 426850000 | 100.00% | WACC= | 7.38% |
Year | 0 | 1 | 2 | 3 | 4 |
1.Initial investment | -2100000 | ||||
2.After-tax sale value of old building(500000*(1-42%)) | 290000 | ||||
3.NWC | -150000 | -200000 | 77000 | -130000 | -54000 |
4.Recovery of initial NWC(150000*80%) | 120000 | ||||
5.ATCF on salvage(see wkgs.) | 1044426 | ||||
Operating cash flows: | |||||
6.Sales | 1600000 | 1800000 | 1700000 | 1900000 | |
7.Variable cost at 50%*sales | -800000 | -900000 | -850000 | -950000 | |
8.Fixed costs | -550000 | -550000 | -550000 | -550000 | |
9.Increase in G/Ps of existing project | 1200000 | 2000000 | 1500000 | 700000 | |
10.Depn.(see wkgs.) | -210000 | -378000 | -302400 | -241920 | |
11.EBIT(sum 6 to 10) | 1240000 | 1972000 | 1497600 | 858080 | |
12.Tax at 42%(11*42%) | -520800 | -828240 | -628992 | -360394 | |
13.EAT/NOPAT(11+12) | 719200 | 1143760 | 868608 | 497686 | |
14.Add Back:Depn.(Line 10) | 210000 | 378000 | 302400 | 241920 | |
15.Operating cash flows(13+14) | 929200 | 1521760 | 1171008 | 739606 | |
16.Total annual FCFs(1+2+3+4+5+15) | -1960000 | 729200 | 1598760 | 1041008 | 1850032 |
17.PV F at 7.38%(1/1.0738^ Yr.n) | 1 | 0.93127 | 0.86727 | 0.80766 | 0.75215 |
18.PV at 7.38%(16*17) | -1960000 | 679084 | 1386553 | 840783 | 1391508 |
19.NPV at 7.38%(sum of Line 18) | 2337927 |
Depreciation wkgs. | |||
Year | Depn. | Book value | |
0 | 2100000 | ||
1 | 210000 | 1890000 | 2100000*20%/2 |
2 | 378000 | 1512000 | |
3 | 302400 | 1209600 | |
4 | 241920 | 967680 | Book value |
1100000 | Sale value | ||
132320 | Gain on sale | ||
55574 | tax at 42% on gain | ||
1044426 | ATCF on salvage(1100000-55574) |
Increase in G/Ps of existing project | |
6000000*20%= | 1200000 |
4000000*50%= | 2000000 |
5000000*30%= | 1500000 |
7000000*10%= | 700000 |