Year 1 2 3 4 5 Revenue 5,400 6,210 7,141.5 8,212.725 9,444.634 Expenses 4,860 5,589 6,427.35 EBIT 540 621 714.15 7,391.453 821.273 EXHIBIT 1: PROJECTED CASH FLOWS FOR THE HERBO EXPANSION PROJECT (* THOUSANDS) 6 7 10,389.097 11,428.007 8 9 10 12,570.808 13,827.888 15,210.677 8,500.17 9,350.187 10,285.206 11,313.727 12,445.099 13,689.609 944.463 1038.91 1,142.801 1,257.081 1,382.789 Tax (30%) 162 186.3 Net earnings 378 434.7 214.245 499.905 246.382 283.339 311.673 574.891 661.124 727.237 342.84 799.96 377.124 414.837 879.957 967.952 1,521.068 456.32 1,064.747 Depreciation (10%) 200 Total cash flows 578 200 634.7 200 699.905 200 774.891 200 861.124 200 927.237 200 200 200 200 999.96 1,079.957 1,167.952 1,264.747 Note: Herbo Herbo Drugs & Pharmaceuticals; = INR - Indian rupee; US$1 = *79.6613 on September 1, 2022; EBIT = earnings before interest and taxes. Source: Compiled by the authors. EXHIBIT 2: FINANCIALS OF COMPARABLE PUBLIC FIRMS (MILLIONS) Company Dabur India Limited Total assets Non-current liabilities Market capitalization Net income Equity Kerala Ayurveda Limited Cipla Limited 86,877.3 917.8 4,986.3 947,450.5 333.1 944.73 14,329.3 8.9 257,911.6 5,106 726,960.2 29,579.3 Dr. Reddy's Laboratories Torrent Pharmaceuticals Ltd. 249,684 119,541.9 5,365 769,608.6 16,232 31,806.4 520,309.1 9,914.5 58,638.7 112.7 225,135.5 183,362 63,454.2 Debt 5,601.8 614.6 189.2 Source Natural Foods and 193.2 5.1 826.5 24.3 156 22,054 33,864.7 0.4 Herbal Supplements Limited Note: INR Indian rupee; US$1 = *79.6613 on September 1, 2022. Source: ProwessIQ, accessed March 15, 2023. WACC
Year 1 2 3 4 5 Revenue 5,400 6,210 7,141.5 8,212.725 9,444.634 Expenses 4,860 5,589 6,427.35 EBIT 540 621 714.15 7,391.453 821.273 EXHIBIT 1: PROJECTED CASH FLOWS FOR THE HERBO EXPANSION PROJECT (* THOUSANDS) 6 7 10,389.097 11,428.007 8 9 10 12,570.808 13,827.888 15,210.677 8,500.17 9,350.187 10,285.206 11,313.727 12,445.099 13,689.609 944.463 1038.91 1,142.801 1,257.081 1,382.789 Tax (30%) 162 186.3 Net earnings 378 434.7 214.245 499.905 246.382 283.339 311.673 574.891 661.124 727.237 342.84 799.96 377.124 414.837 879.957 967.952 1,521.068 456.32 1,064.747 Depreciation (10%) 200 Total cash flows 578 200 634.7 200 699.905 200 774.891 200 861.124 200 927.237 200 200 200 200 999.96 1,079.957 1,167.952 1,264.747 Note: Herbo Herbo Drugs & Pharmaceuticals; = INR - Indian rupee; US$1 = *79.6613 on September 1, 2022; EBIT = earnings before interest and taxes. Source: Compiled by the authors. EXHIBIT 2: FINANCIALS OF COMPARABLE PUBLIC FIRMS (MILLIONS) Company Dabur India Limited Total assets Non-current liabilities Market capitalization Net income Equity Kerala Ayurveda Limited Cipla Limited 86,877.3 917.8 4,986.3 947,450.5 333.1 944.73 14,329.3 8.9 257,911.6 5,106 726,960.2 29,579.3 Dr. Reddy's Laboratories Torrent Pharmaceuticals Ltd. 249,684 119,541.9 5,365 769,608.6 16,232 31,806.4 520,309.1 9,914.5 58,638.7 112.7 225,135.5 183,362 63,454.2 Debt 5,601.8 614.6 189.2 Source Natural Foods and 193.2 5.1 826.5 24.3 156 22,054 33,864.7 0.4 Herbal Supplements Limited Note: INR Indian rupee; US$1 = *79.6613 on September 1, 2022. Source: ProwessIQ, accessed March 15, 2023. WACC
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
Related questions
Question
Herbo is a pharmaceutical company that is eyeing expansion. The entire decision on expansion is dependant on the accurate estimation of WACC. The project is planned to be financed by 80% Equity and 20% Debt. At this time Herbo had almost no debt. Inititial cost of expansion is 6.5 million which covers capex and working capital. Herbo's projected cash flows as well as some supporting numbers on comparable firms can be found below.
Herbo's
Herbo's after tax cost of debt is 6.006%
Herbo's WACC is 10.8012%
How does capital structure affect WACC? Perform a sensitivity analysis for WACC based on Capital Structure.
Transcribed Image Text:Year
1
2
3
4
5
Revenue
5,400
6,210
7,141.5
8,212.725 9,444.634
Expenses
4,860
5,589
6,427.35
EBIT
540
621
714.15
7,391.453
821.273
EXHIBIT 1: PROJECTED CASH FLOWS FOR THE HERBO EXPANSION PROJECT (* THOUSANDS)
6
7
10,389.097 11,428.007
8
9
10
12,570.808 13,827.888 15,210.677
8,500.17 9,350.187 10,285.206 11,313.727 12,445.099 13,689.609
944.463
1038.91 1,142.801
1,257.081 1,382.789
Tax (30%)
162
186.3
Net earnings
378
434.7
214.245
499.905
246.382
283.339
311.673
574.891
661.124
727.237
342.84
799.96
377.124
414.837
879.957
967.952
1,521.068
456.32
1,064.747
Depreciation (10%)
200
Total cash flows
578
200
634.7
200
699.905
200
774.891
200
861.124
200
927.237
200
200
200
200
999.96
1,079.957
1,167.952
1,264.747
Note: Herbo Herbo Drugs & Pharmaceuticals; = INR - Indian rupee; US$1 = *79.6613 on September 1, 2022; EBIT = earnings before interest and taxes.
Source: Compiled by the authors.
EXHIBIT 2: FINANCIALS OF COMPARABLE PUBLIC FIRMS (MILLIONS)
Company
Dabur India Limited
Total assets
Non-current
liabilities
Market
capitalization
Net income
Equity
Kerala Ayurveda Limited
Cipla Limited
86,877.3
917.8
4,986.3
947,450.5
333.1
944.73
14,329.3
8.9
257,911.6
5,106
726,960.2
29,579.3
Dr. Reddy's Laboratories
Torrent Pharmaceuticals Ltd.
249,684
119,541.9
5,365
769,608.6
16,232
31,806.4
520,309.1
9,914.5
58,638.7
112.7
225,135.5
183,362
63,454.2
Debt
5,601.8
614.6
189.2
Source Natural Foods and
193.2
5.1
826.5
24.3
156
22,054
33,864.7
0.4
Herbal Supplements Limited
Note: INR Indian rupee; US$1 = *79.6613 on September 1, 2022.
Source: ProwessIQ, accessed March 15, 2023.
WACC
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