| time | 360 | |||||||||||||||
| 1 | a) i) | emi | -$2,40,000.00 | rate | 3.60% | monthly rate | 0.30% | |||||||||
| principal | 800000 | |||||||||||||||
| principal | interest | |||||||||||||||
| 1 | -$1,237.16 | -$2,38,762.84 | ||||||||||||||
| 299 | -$3,020.68 | -$2,36,979.32 | interest to be paid in 1st month of 25th year = | $236979.32 | ||||||||||||
| a)ii) | total emi | 86400000 | ||||||||||||||
| principal | 800000 | |||||||||||||||
| total interest | 85600000 | Total interest paid over the life of loan = | $85600000 | |||||||||||||
| b) | The total interest that is to be paid over the life of the loan is a huge amount and it is almost equivalent to the Emi , so in that case it is not relevant enough to take loan with this rate of interest | |||||||||||||||
| c) | present value | $1,97,27,073.63 | ||||||||||||||
| d) | Actual Principle | $8,00,000.00 | ||||||||||||||
| Present Value | $1,97,27,073.63 | |||||||||||||||
| Difference | $1,89,27,073.63 | |||||||||||||||
| The major difference between the two is due to the rate of interest and that has made the amount of loan double that is to be repayed, hence loan at this rate should not be taken by the companies. | ||||||||||||||||
| Question 2 | ||||||||||||||||
| Cost of Debt Calculation | ||||||||||||||||
| ai) | 2.2 / 0.08 = 0.176 | |||||||||||||||
| Before Tax Cost of Debt = 0.176 + [(2.2-2)/5] /(2.2+2)/2 | ||||||||||||||||
| = 10.42% | ||||||||||||||||
| Cost of Equity Calculation | ||||||||||||||||
| Cost of Equity = Risk Free Rate + (Market Return – Risk Free Rate)*Beta | ||||||||||||||||
| = 5.00% + (15.00% – 5.00%)*1.20 | ||||||||||||||||
| = 17.00% | ||||||||||||||||
| D/V = 6/9 = 0.66667 E/V = 3/9 = 0.33333 | ||||||||||||||||
| WACC = [(0.6667*0.1042) + (0.3333*0.17)*(1-0.20)] = 11.47% | ||||||||||||||||
| aii) | The rate of discount would be taken to be 17%, given the cost of debt is that | |||||||||||||||
| (Amount in $ Mn) | ||||||||||||||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 | ||||||||||
| Charges of S. Corp | – | 2.00 | 2.20 | 2.42 | 2.66 | 2.93 | ||||||||||
| Initial Investment | 600.00 | – | – | – | – | – | ||||||||||
| Annual Variable costs | – | 240.00 | 288.00 | 345.60 | 414.72 | 497.66 | ||||||||||
| Net working capital | – | 80.00 | 96.00 | 115.20 | 138.24 | 165.89 | ||||||||||
| Fixed costs | – | 80.00 | 80.00 | 80.00 | 80.00 | 80.00 | ||||||||||
| bi) | Total Outflow | 600.00 | 402.00 | 466.20 | 543.22 | 635.62 | 746.48 | |||||||||
| Revenue | – | 800.00 | 960.00 | 1,152.00 | 1,382.40 | 1,658.88 | ||||||||||
| Salvage Value | – | – | – | – | – | 300.00 | ||||||||||
| Depreciation tax shield | – | 24.00 | 24.00 | 24.00 | 24.00 | 24.00 | ||||||||||
| Total inflow | – | 824.00 | 984.00 | 1,176.00 | 1,406.40 | 1,982.88 | ||||||||||
| bii) | Net cash inflow / (outflow) | -600.00 | 422.00 | 517.80 | 632.78 | 770.78 | 1,236.40 | |||||||||
| Discounting factor @ 17% | 1 | 0.8547 | 0.7305 | 0.6244 | 0.5337 | 0.4561 | ||||||||||
| Present value of cash flows | -600.00 | 360.68 | 378.26 | 395.09 | 411.33 | 563.94 | ||||||||||
| biii) | NPV for first 5 years | 1,509.29 | ||||||||||||||
| biv) | Since the NPV is positive after 5years the company should accept the project. | |||||||||||||||
| a)i) | total annual dividend received by maureen = | 560 | b)i) | earnings after tax = | 22400 | |||||||||||
| total annual dividend received by maureen = | 448 | |||||||||||||||
| ii) | total number of shares repurchased = | 2500 | ||||||||||||||
| ii) | same as part a | |||||||||||||||
| iii) | total number of bonds received by maureen= | 6 | ||||||||||||||
| total dividend to be received by maureen= | 360 | iii) | same as part a | |||||||||||||
| iv) | earnings before tax= | 19000 | iv) | earnings before tax = | 19000 | |||||||||||
| cash inflow for maureen= | 760 | tax | 3800 | |||||||||||||
| cash outflow for maureen= | 360 | earnings after tax= | 15200 | |||||||||||||
| cash flow from home made leverage= | 400 | cash inflow for maureen= | 608 | |||||||||||||
| cash outflow for maureen= | 360 | |||||||||||||||
| cash flow from home made leverage= | 248 | |||||||||||||||
| v) | The capital structure is relevant because the liquidity of the company is maintained on grounds where we can see that the home made leverage is positive. | |||||||||||||||
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