User Account

All Pages

How are the inputs transformed into the outputs

Assignment Help Financial Management
Reference no: EM13306174

Q1:

COMPUTE WEIGHTED AVERAGE COST OF CAPITAL enter data in blue-colored cells




BASIC:
Formula Equation
COST OF DEBT:


   Coupon Rate 0.00% given
   Marginal Tax Rate 0.0% given
   Cost of Debt 0.00% b5*(1-b6) k-d = I x (1-t)
      weight of debt 0%   d ÷ d+e




COST OF EQUITY:


   Risk-Free Rate 0.00% given
   Risk Premium 0.00% given R-m - R-f
   Beta 0.00 given
   Cost of Equity 0.00% b11+(b13*b12) k-e = R-f + [ß x (R-m - R-f)]
       weight of equity 100% 1-b8 e ÷ d+e




Weighted-Average Cost of Capital 0.00% (b8*b7)+(b15*b14) (k-d x wt-d)+(k-e x wt-e)

Page 75 in Cohen Finance Workbook displays a K-wacc calculation for a company.

Suppose that the inputs to that k-wacc calculation have changed.

The company's financial risk has increased, so its coupon rate is now 9%.

Its marginal tax rate increased to 30%.

To reduce financial risk, its 'target' weight of debt is reduced to 30%.

The risk-free rate on treasury bonds is now 2%.

The risk premium stays the same at 8%.

The beta, reflecting higher financial risk, rises to 1.5.

Recalculate k-wacc, using the template at the top of this page.

Explain the significance of the change in k-wacc to the capital budgeting analysis and recommendation. Use the box below:

Q2a - Explain how the table below works, i.e., what are the inputs, what are the outputs, and how are the inputs transformed into the outputs.

HINT: Examine the formulas in the cells. 

Change in Net Working Capital:            
Revenue   1000.0 1000.0 1000.0 1000.0 1000.0
Cost of goods sold   22.0 22.0 22.0 22.0 22.0
Receivables (enter days in Column B) 30 82.2 82.2 82.2 82.2 82.2
Inventory (enter days in Column B) 50 3.0 3.0 3.0 3.0 3.0
Payables (enter days in Column B) 25 1.5 1.5 1.5 1.5 1.5
Net working capital needs   83.7 83.7 83.7 83.7 83.7
Liquidation of working capital           0.0
Investment in working capital    83.7 0.0 0.0 0.0 0.0

Q2b - Row 43 changes compared to row 14 in Q2a. Explain how the investment in working capital changes (compared to the amount in Q2a) and why. Change in Net Working Capital:

Revenue   1000.0 1100.0 1200.0 1300.0 1400.0
Cost of goods sold   22.0 24.2 26.4 28.6 30.8
Receivables (enter days in Column B) 30 82.2 90.4 98.6 106.8 115.1
Inventory (enter days in Column B) 50 3.0 3.3 3.6 3.9 4.2
Payables (enter days in Column B) 25 1.5 1.7 1.8 2.0 2.1
Net working capital needs   83.7 92.1 100.4 108.8 117.2
Liquidation of working capital




0.0
Investment in working capital    83.7 8.4 8.4 8.4 8.4

Q2c - B71 and B72 are changed from the number of days in Q2a and Q2b. Explain how the investment in working capital changes (compared to the amount in Q2b) and why.

Change in Net Working Capital:            
Revenue   1000.0 1100.0 1200.0 1300.0 1400.0
Cost of goods sold   22.0 24.2 26.4 28.6 30.8
Receivables (enter days in Column B) 60 164.4 180.8 197.3 213.7 230.1
Inventory (enter days in Column B) 100 6.0 6.6 7.2 7.8 8.4
Payables (enter days in Column B) 25 1.5 1.7 1.8 2.0 2.1
Net working capital needs   168.9 185.8 202.7 219.6 236.5
Liquidation of working capital           0.0
Investment in working capital    168.9 16.9 16.9 16.9 16.9

Q3a

Free cash flow:            
Operating cash flow
72.6 88.8 105.1 109.6 124.3
Minus: Invesment in net working capital   12.3 3.1 3.1 0.9 1.8
Minus: Investment in PPE (CapEx) 300.0 0.0 0.0 0.0 0.0 0.0
Plus: Salvage value           0.0
Free cash flow -300.0 60.3 85.7 102.0 108.7 122.5
Cumulative free cash flow -300.0 -239.7 -154.0 -52.0 56.7 179.2
 




 
Discount rate (K-wacc) 10.9%



 
Net Present Value (NPV) 43.7



 
Profitability Index (PI) 1.1



 
Internal Rate of Return (IRR) 15.9%



 
Payback Period (PP) inspection          

Using the data below for the three projects, and the formulas you discerned in B12, B13, and B14, calculate NPV, PI, and IRR for the three projects, using two different k-wacc discount rates, 8% and 11%. The data for Projects A,B,C are arrayed vertically; they are the same as row 8 in the horizontal panel above.


 Project A Project B Project C
Initial Outlay -50,000 -100,000 -450,000
Cash Inflows: Yr 1 10,000 25,000 200,000
                       Yr 2 15,000 25,000 200,000
                       Yr 3 20,000 25,000 200,000
                       Yr 4 25,000 25,000
                       Yr 5 30,000 25,000

Q3b Interpret the meaning of the calculations you made in Q3a.

Hint: Do you recommend accepting or rejecting the projects?
Hint: What is the impact on the decision metrics when k-wacc changes from 8% to 11%?
Hint: Do all three decision metrics lead to the same recommendation?

Reference no: EM13306174

Questions Cloud

The disposal of hazardous waste generated by the daily runn : GeneralHospital(GH)is looking to identify a suitable supplier for the disposal of hazardous waste generated by the daily running of the facility for the next 12 months.
How much will e85 fuel have to cost to make flex-fueled car : One blend that is gaining popularity is E85, which is 85% ethanol and 15% gasoline. E85 is 80% cleaner burning than gasoline alone, and it reduces our dependency on foreign oil. But a flex-fueled car costs $1,000 more than a conventional gasoline-..
Determine the final temperature of the drink : A 25 g glass tumbler contains 410 mL of water at 24 °C. If two 20 g ice cubes each at a temperature of -3 °C are dropped into the tumbler
Describe the types of information available to a program : Describe the types of information available to a program when using the KeyListener interface.
How are the inputs transformed into the outputs : Explain how the table below works, i.e., what are the inputs, what are the outputs, and how are the inputs transformed into the outputs and explain how the investment in working capital changes (compared to the amount in Q2a) and why.
Write a few lines of code to create a timer in java : Write a few lines of code to create a timer in Java which fires an ActionEvent every 150 msec. Assume the existence of a TimerEventHandler class which needs to respond to timer events.
Obtain the specific heat of the metal : The specific heat of a certain metal can be determined by measuring the temperature change that occurs when a piece of the metal is heated, What is the specific heat of the metal
What interface does an application need to use : What interface does an application need to use if it wants to get updates on the current position of the mouse cursor as the mouse is being moved? How does the program get the x,y coordinates of the mouse cursor?
Calculate the temperature of flat world that has an albedo : Calculate the temperature of "flat world" that has an albedo of 0.31 and a solar flux of 1370 w/m^2. One side of flat world faces the sun. Ignore energy emitted from the edge of flat world.

Reviews

Write a Review

Financial Management Questions & Answers

  Theme of cloud computing

Different places as it moves from office to living room and into our pockets and where is this all headed.

  Develop a balanced scorecard

Develop a BSC that is aligned to the key goal in the strategic plan, i.e. exceeding revenue of $25 million dollars by 2015. Develop, quantify and justify suitable key performance measurement criteria for Anthony's Orchard in each of these four key..

  Calculate the present value of the capital portion

The fair rate of return on similar debentures is 14% before tax. Calculate the present value of the capital portion of the debenture.

  Write a brief memorandum to the tax files

Write a brief memorandum to the tax files that summarizes the advice you should give Ron - you notice that Ron has not reported any part of the award as income and has included the medical expenses in computing his itemized deductions.

  Evaluate the fcf valuation

Explain results of your Market Multiples analysis and reconcile the FCF Valuation results with the Market Multiples Valuation results

  What gives rise to the currency exposure at aifs

What gives rise to the currency exposure at AIFS and what would happen if Archer-Lock and Tabaczynski did not hedge at all?

  Forecasting interest rates based on prevailing conditions

discuss the impact of each of the factors on your opinion. Offer some logic or current reference(s) to support your answer. Which factor do you think will have the biggest impact on interest rates?

  Evaluate each franchise''s npv

According to the NPV, which franchise or franchises would be accepted if they are independent? Which could be accepted if they are mutually exclusive? Evaluate each franchise's NPV? Be sure to show your calculations.

  Determine the cost of equity based on capm

Determine the cost of equity based on CAPM? Compute the firm's WACC? Estimate the cash flow for each year of this project

  Identify the macro sovereign risks

Identify the macro sovereign risks and problems and their potential effect on QN's competitive advantage (in fact QN has not established what its competitive advantage really is, though it has been very successful in the UK and the euro area).

  Currency futures to hedge the exchange rate risk

Explain how forward contracts and currency futures could be used by Mega Company and construct appropriate hedges with forward contracts and currency

  Explain what are the three distribution methods available

What are the three distribution methods available to Annette? Which method should she choose to maximize tax deferral? Based on the appropriate life table, how much would her first required distribution be? When would this distribution happen?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd