which has been sold off) represevted 30% o il calue ofthe Brm and that the unlev
ID: 2798466 • Letter: W
Question
which has been sold off) represevted 30% o il calue ofthe Brm and that the unlevered beta for steel companies is 6 o One third of the cash from the divestiture was used to pay dewn debt and the orhve two thirds was used to pay a special dividend. Estimate the beta for Trumpeter afte the restructuring (5 points) 2. upfront investment of $ 10 million and equal annual after-tax cashflows for the next 10 years The analyst has estimated a net You have been asked to review an investment analysis of a 10-year project with a big present value for the project of $ 1.5 million, using the cost of equity of the firm of 12% as the discount rate. You notice three errors in the valuation. a. The cashflows being discounted are after taxes but before debt payments (interest and principal). The after-tax cost of debt for the firm is 490 and the firm has a debt to capital ratio of 30%. b. The analyst has depreciated the initial investment of S 10 million straight line over 10 years to a salvage value of zero. You agree with the str aight line depreciatio but you believe that the asset should be depreciated down to an expected salvage value at the end of the 10th year of $ 2 million.Explanation / Answer
Soln : By using the cash flow as X and as it is given NPV = $1.5 million
We can say that , 1.5 = -10 + X/1.12*(1-1/1.12^9)/(1-1/1.12) +2/1.12^10
On solving we get X = $2.00 million
WACC = 0.3*4% + 0.7*12 = 9.6% = discount rate
Please refer here the table all the corrections are made and cash flow is reprsented:
NPV of the project = $10.63 million
Year 0 1 2 3 4 5 6 7 8 9 10 cash outflow -10.00 Cash infow 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2.00 2 Cash inflow including taxes 2.80 2.80 2.80 2.80 2.80 2.80 2.80 2.80 2.80 2.8 Add depreciation 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.80 3.8 Revised depreciation 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.80 0.8 Net income before taxes 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3.00 3 Income after taxes 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.80 1.8 non cash working capital 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.5 Net cash 3.30 3.30 3.30 3.30 3.30 3.30 3.30 3.30 3.30 3.3 discount rate 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.10 1.096 PV 3.01 2.75 2.51 2.29 2.09 1.90 1.74 1.59 1.45 1.32 NPV 10.63Related Questions
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