Question

In: Finance

These are the cash flows. Year 0 1 2 3 4 5 6 Revenue 3.2000 4.0000...

These are the cash flows.

Year	0	1	2	3	4	5	6
Revenue		3.2000	4.0000	5.6000	5.6000	4.0000	2.4000
Expenses		.7200	.9000	1.2600	1.2600	.9000	.5400
Depreciation		.9500	.9500	.9500	.9500	.9500	.9500
Pretax profit		1.5300	2.1500	3.3900	3.3900	2.1500	.9100
Tax		.5355	.7525	1.1865	1.1865	.7525	.3185
Net income		.9945	1.3975	2.2035	2.2035	1.3975	.5915
OCF		1.9445	2.3475	3.1535	3.1535	2.3475	1.5415

Cash flow investment	−5.7000						.4362
Change in NWC	−.3200	−.0800	−.1600	0.0000	.1600	.1600	.2400
OCF	0.0000	1.9445	2.3475	3.1535	3.1535	2.3475	1.5415
Total cash flow	−6.0200	1.8645	2.1875	3.1535	3.3135	2.5075	2.2177

Use this detail to determine answers to the questions below.

Ray’s Racks is a publicly traded company. The current stock price is $3.00 per share, and there are 20 million shares outstanding. The present value of the company’s debt is $40,000,000. The company has a bond issue outstanding with 6 years to maturity. The face value is $1,000, the coupon rate is 8% (paid quarterly), and the bond is currently selling for $1,020. The company’s corporate tax rate is 35% and their beta is 1.41. The current risk free rate is 5%, and the historic market return is 12%.

NOTE: It is critical that you do not round intermediate calculations. For example, while you may provide the after-tax cost of debt rounded to two decimal places, DO NOT calculate the WACC using rounded numbers. DO NOT calculate the NPV using a WACC that was rounded to two decimal places. These will give you incorrect answers. Provide each answer as requested, but DO NOT round intermediate calculations.

Question 1. What is the weighting to be used for equity in the WACC calculation?

Question 2. What is the weighting to be used for debt in the WACC calculation?

Question 3. What is the project's NPV?

Solutions

Expert Solution

Answer (1):

Market value of equity = current stock price * Number of shares outstanding = 3 * 20 = $60 million

Value of debt = $40,000,000 = $40 million

Total market value = 60 + 40 = $100 million

Weighting to be used for equity in the WACC calculation = 60 / 100 = 60%

Weighting to be used for equity in the WACC calculation = 60%

Answer (2):

Weighting to be used for debt in the WACC calculation = 40 / 100 = 40%

Weighting to be used for debt in the WACC calculation = 40%

Answer (3):

NPV = 4.63155874863646

(amount is not rounded)

Working:

Let us calculated WACC:

Cost of equity = Risk free rate + Beta * (Market rate of return - Risk free rate)

= 5% + 1.41 * (12% - 5%)

= 14.87%

Cost of debt:

Price = PV = $1020

Par value =FV = $1,000

Quarlty coupon = 1000 * 8%/4 = $20

Time to maturity in quarters = 6 * 4 = 24

Quartely cost of debt = RATE(nper, pmt, pv, fv, type) = RATE(24, 20, -1020, 1000, 0) = 1.89550536187566%

Before tax cost debt = 1.89550536187566% * 4 = 7.58202144750264%

WACC = Cost of equity * weight of equity + Before tax cost of debt * (1 - Tax rate) * Weight of debt

= 14.87% * 60% + 7.58202144750264% * (1 - 35%) * 40%

= 10.8933255763507%

NPV Calculation:

The above excel with 'show formula' is as follows:

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Consider the following cash flows: Year 0 1 2 3 4 5 6 Cash Flow -$10,000...

Consider the following cash flows: Year 0 1 2 3 4 5 6 Cash Flow -$10,000 $2,200 $3,300 $2,500 $2,500 $2,300 $2,100 A. Payback The company requires all projects to payback within 3 years. Calculate the payback period. Should it be accepted or rejected? B. Discounted Payback Calculate the discounted payback using a discount rate of 10%. Should it be accepted or rejected? C. IRR Calculate the IRR for this project. Should it be accepted or rejected? D. NPV Calculate...

Year Promisedcash flows Expectedcash flows 1 6 5 2 6 5 3 6 5 4 6...

Year Promisedcash flows Expectedcash flows 1 6 5 2 6 5 3 6 5 4 6 5 5 6 5 6 6 5 7 6 5 8 6 5 9 6 5 10 106 95 What is the present value today of promised cash flows at 6%? If the price of the bond is 80, what is the yield to maturity of the bond using the promised cash flows? What is the present value today of the expected cash flows...

Consider cash flows for projects A and B Year: 0, 1, 2, 3, 4, 5 Project...

Consider cash flows for projects A and B Year: 0, 1, 2, 3, 4, 5 Project A: -$1000, 375, 375, 375, 375,-100 Project B: -$1000, 900, 700, 500, -200, 200 The cost of capital for both projects is 10% 1. Find the NPV and MIRR of projects A and B. If project A and B are mutually exclusive. 2. Find the crossover rate for projects A and B. 3. What is the profitability index for projects A and B? How...

Use these cash flows to answer the following questions: Year 0 1 2 3 4 5...

Use these cash flows to answer the following questions: Year 0 1 2 3 4 5 6 A (4,000) 800 1,400 1,300 1,200 1,100 1,000 B (2,000) 700 1,300 1,200 0 0 0 a. Calculate the NPV for projects A and B using a 20 percent discount rate (write the calculate keys that you use to get the answer). b Calculate the Equivalent Annual Annuity (EAA) for projects A and B using a 20 percent discount rate (write the calculate...

exampleInput.txt 1 2 3 0 2 3 4 0 1 3 5 0 1 2 6...

exampleInput.txt 1 2 3 0 2 3 4 0 1 3 5 0 1 2 6 1 5 6 8 2 4 6 7 3 4 5 9 10 5 8 9 4 7 9 6 7 8 6 How can I detect when 'cin' starts reading from a new line. The amount of numbers in each row is unknown. I need them in type 'int' to use the data.

There are two projects with the following cash flows. Years: 0 1 2 3 4 5...

There are two projects with the following cash flows. Years: 0 1 2 3 4 5 Project 1: -210 125 125 175 175 -400 Project 2: 300 -95 -75 -125 -400 600 a. What are the NPVs of these two projects if market interest rate is 3%? b. With the interest rate of 6%, please modified these two projects to let them have only one IRR for each one of them. (That means the sign of cash flows of each project...

TABLE 4 Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash...

TABLE 4 Project Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow A -15000 6000 7000 6000 6000 6000 B -15000 7000 7000 7000 7000 7000 C -18000 12000 2000 2000 2000 2000 "Consider the cash flow of the three projects depicted in Table 4. The cost of capital is 7.5%. If an investor decided to take projects with a payback period of 2 years...

You have 3 projects with the following cash flows: Year 0 1 2 3 4 Project...

You have 3 projects with the following cash flows: Year 0 1 2 3 4 Project 1 -$ 152 $22 $39 $58 $82 Project 2 −826 0 0 7,010 −6,506 Project 3 21 41 61 80 −247 a. For which of these projects is the IRR rule reliable? b. Estimate the IRR for each project (to the nearest1%). c. What is the NPV of each project if the cost of capital is 5%?20 %50%? a. For which of these...

You have 3 projects with the following cash flows: Year 0 1 2 3 4 Project...

You have 3 projects with the following cash flows: Year 0 1 2 3 4 Project 1 −$151 $ 21 $ 39 $ 59 $ 80 Project 2 −824 00 00 6,999 −6,501 Project 3 2020 40 62 81 −245 a. For which of these projects is the IRR rule reliable? b. Estimate the IRR for each project (to the nearest 1%). c. What is the NPV of each project if the cost of capital is 5%? 20%? 50%? a....

x (Bins) frequency 0 0 1 0 2 0 3 2 4 5 5 8 6...

x (Bins) frequency 0 0 1 0 2 0 3 2 4 5 5 8 6 13 7 33 8 42 9 66 10 77 11 105 12 103 13 110 14 105 15 84 16 70 17 51 18 40 19 27 20 27 21 15 22 5 23 7 24 2 25 2 26 1 27 0 28 0 29 0 30 0 (7) On the Histogram worksheet, calculate all frequencies of the distribution using the table shown....

Subjects