Question

Q1: Carrefour is expecting its new center to generate the following cash flows:

Years	0	1	2	3	4	5
Initial Investment	($35,000,000)
Net operating cash-flow		$6,000,000	$8,000,000	$16,000,000	$20,000,000	$30,000,000

a. Determine the payback for this new center. (1 mark)

b. Determine the net present value using a cost of capital of 15 percent. Should the project be accepted? (1 mark)

Answer:

Q2. What is the EAC of two projects: project A, which costs $150 and is expected to last two years, and project B, which costs $190 and is expected to last three years? The cost of capital is 12%. (1 mark)

Answer:

Q3. A company pays annual dividends of $10.40 with no possibility of it changing in the next several years. If the firm’s stock is currently selling at $80, what is the required rate of return? (1 mark)

Answer:

Q4. Stag corp has a capital structure which is based on 50% common stock, 20% preferred stock and 30% debt. The cost of common stock is 14%, the cost of preferred stock is 8% and the pre-tax cost of debt is 10%. The firm's tax rate is 40%. (1 mark)

1. Calculate the WACC of the firm.
2. The firm is considering a project that is equally as risky as the firm's current operations. This project has initial costs of $280,000 and annual cash inflows of $66,000, $320,000, and $133,000 over the next three years, respectively. What is the net present value of this project ?

Answer 1

1.a)

as

years	Initial Investment	Net Operating Cashi flow	Cumulative cash
0	($35,000,000)
1		$6,000,000	$6,000,000
2		$8,000,000	$14,000,000
3		$16,000,000	$30,000,000
4		$20,000,000	$50,000,000
5		$30,000,000	$80,000,000
Calculation of payback period
	Year before full recovery+	unrecovered cost at start of year
		Cash flow during year
	3+(35,000,000-30,000,000)/16,000,000
	3+5,000,000/16,000,000
	3+0.3125
	3.3125 years Answer b). years Initial Investment Net Operating Cashi flow Cost of capital@15% 0 ($35,000,000) 1 $6,000,000 0.86957 5217391.304 2 $8,000,000 1.16257 9300568 3 $16,000,000 2.28323 36531680 4 $20,000,000 2.85498 57099600 5 $30,000,000 3.35216 100564800 Total discounted cash flow 208714039.3 Cash outflow ($35,000,000) NPV $173,714,039

As NPV is positive , we shoud accept the project.

Answer2)

EAC= Asset Price×Discount Rate

   1-(1+Discount rate)​ −n

Project A

EAC=

Project A
EAC	150*0.12/1-(1+0.12)-2
	18/1-(1.12)-2
Nominator	18
denominator	1-1/1.2544
denominator	1.2544-1/1.2544
	0.2544/1.2544
	0.202806122
EAC	18/0.202806122
	88.75471718

	Project B
	190*0.12/1-(1+0.12)-3
	22.8/1-(1.12)-3
Nominator	22.8
denominator	1-1/1.402464
denominator	1.402464-1/1.402464
	0.402464/1.402464
denominator	0.286969
EAC	22.8/0.286969
	79.45109

ANSWER 3)

Cost of capital= Dividend paid/ selling price of stock

=10.40/80

= 0.135 or 13.5%

Answer 4):
Capital structure of the stag corp
= 50% common stock + 20% preferred stock + 30% debt

Cost of common stock(Ke)= 14%
Cost of preferred Stock(Kp)= 8%
Cost of debt(Kd)= 10%
Tax= 40%

Answer a) WACC

Ke*% of common stock + Kp* % of Preferred Stock + Kd(1-tax)*% of Debt

=14%*50%+ 8%*20% + (1-0.4)10%*30%
=7%+1.6%+(0.6)3
=7%+1.6%+1.8%
=10.4%

Answer B)

years	Initial Investment	Net Operating Cashi flow	[email protected]%
0	($280,000)
1		$66,000	0.9057971	59782.6087
2		$320,000	0.82046839	262549.8845
3		$133,000	0.74317781	98842.64919
			Total discounted cash flow	421175.1424
			Cash outflow	($280,000)
			NPV	$141,175