3) You are valuing a four year project. The initial capital expenditure (capex) is $125 million. You have a risk free agreement to sell the PP&E four years from now for $80 million. The relevant corporate tax rate is 30%, the cost of equity capital is 25%, and the WACC is 17%. Assume that net operating working capital needs are 30% of revenue and that you recoup your NOWC three months after you sell the equipment. Assume that we recognize operating cash flows in the middle of the year. The risk free rate is 4.5%. Based on the projections below, what is value of this project? (in $ millions) Revenue COGS Gross Margin SG&A EBITDA Depreciation EBIT Interest Expense EBT Taxes Net Income Additional Capex Year 1 60.0 (10.0) 50.0 (25.0) 25.0 (10.0) 15.0 (5.0) 10.0 (3.0) 7.0 20 Year 2 110.0 150.0 (25.0) (38.0) 85.0 112.0 (40.0) 45.0 (10.0) 35.0 (5.0) 30.0 (9.0) 21.0 Year 3 15 (55.0) 57.0 (10.0) 47.0 (5.0) 42.0 Year 4 0 120.0 (30.0) 90.0 (40.0) 50.0 (10.0) 40.0 (5.0) 35.0 (12.6) (10.5) 29.4 24.5 0 (in $ millions) a) b) c) d) -4.068 5.995 3.324 -22.057
3) You are valuing a four year project. The initial capital expenditure (capex) is $125 million. You have a risk free agreement to sell the PP&E four years from now for $80 million. The relevant corporate tax rate is 30%, the cost of equity capital is 25%, and the WACC is 17%. Assume that net operating working capital needs are 30% of revenue and that you recoup your NOWC three months after you sell the equipment. Assume that we recognize operating cash flows in the middle of the year. The risk free rate is 4.5%. Based on the projections below, what is value of this project? (in $ millions) Revenue COGS Gross Margin SG&A EBITDA Depreciation EBIT Interest Expense EBT Taxes Net Income Additional Capex Year 1 60.0 (10.0) 50.0 (25.0) 25.0 (10.0) 15.0 (5.0) 10.0 (3.0) 7.0 20 Year 2 110.0 150.0 (25.0) (38.0) 85.0 112.0 (40.0) 45.0 (10.0) 35.0 (5.0) 30.0 (9.0) 21.0 Year 3 15 (55.0) 57.0 (10.0) 47.0 (5.0) 42.0 Year 4 0 120.0 (30.0) 90.0 (40.0) 50.0 (10.0) 40.0 (5.0) 35.0 (12.6) (10.5) 29.4 24.5 0 (in $ millions) a) b) c) d) -4.068 5.995 3.324 -22.057
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
Transcribed Image Text:3) You are valuing a four year project. The initial capital expenditure (capex) is $125 million. You have a risk free
agreement to sell the PP&E four years from now for $80 million. The relevant corporate tax rate is 30%, the
cost of equity capital is 25%, and the WACC is 17%. Assume that net operating working capital needs are 30% of
revenue and that you recoup your NOWC three months after you sell the equipment. Assume that we recognize
operating cash flows in the middle of the year. The risk free rate is 4.5%. Based on the projections below, what
is value of this project?
(in $ millions)
Revenue
COGS
Gross Margin
SG&A
EBITDA
Depreciation
EBIT
Interest Expense
EBT
Taxes
Net Income
Additional Capex
Year 1
60.0
(10.0)
50.0
(25.0)
25.0
(10.0)
15.0
(5.0)
10.0
(3.0)
7.0
20
Year 2
110.0
(25.0)
85.0
(40.0)
45.0
(10.0)
35.0
(5.0)
30.0
(9.0)
21.0
15
Year 3
150.0
(38.0)
112.0
(55.0)
57.0
(10.0)
47.0
(5.0)
42.0
(12.6)
29.4
0
Year 4
120.0
(30.0)
90.0
(40.0)
50.0
(10.0)
40.0
(5.0)
35.0
(10.5)
24.5
0
(in $ millions)
a)
b)
c)
d)
-4.068
5.995
3.324
-22.057
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