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Corporate Finance Assignment - Doc

   

Added on  2020-01-21

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CORPORATEFINANCE03

Table of Contents1. Calculate BPT’s company after-tax WACC, rounded to four decimal places........................32. Calculate RV Division WACC using the method in paragraph 6...........................................33. Was the business risk of RV Division higher than, lower than or equal to its industrycompetitors if industry equity beta and RV divisional equity beta were the same as 2.10?Explain.........................................................................................................................................44. Complete Table 1 fully, in accordance with the given assumptions, to show how the freecash flow in year 1 to year 6 is derived.......................................................................................45. Calculate the terminal value as of year 5 using the constant-growth discounted cash flowformula.........................................................................................................................................56. Use an appropriate cost of capital, calculate the present value of the RV Division withoutexpansion.....................................................................................................................................67. Calculate the NPVt=1 of the expansion in Table 2 with the appropriate cost of capital.........68. Calculate the value of the option for RV Division to expand as of year 0..............................69. Calculate the value of the abandonment option at t=0 if RV Division could be sold toanother company for $51 million, without any expansion undertaken, at the beginning of year2...................................................................................................................................................710. Calculate the economic depreciation in year 1 based on the completed free cash flow inTable 1.........................................................................................................................................711. From the shareholders’ viewpoint, what would be the major criticism on the STIP for2016? Explain..............................................................................................................................712. From the viewpoint of Harper, what would be the worst feature of the long-termincentives? Explain......................................................................................................................813. Calculate the alternative divisional WACC using the 3-step procedures in paragraph 19....814. Name only one specific source of finance from the balance sheet BPT would use for theexpansion project scheduled for next year? Assume BPT’s financial position next year wouldbe the same as of 31/12/16. .........................................................................................................815. What should be the amount of the final dividend to be declared for financial year 2016?Explain.........................................................................................................................................916. Calculate implied dividend for the year 2017........................................................................917. Should BPT increase the discount on the DRP for its 2017 dividends in order to attract ahigher reinvestment rate? Explain.............................................................................................10REFERENCES..............................................................................................................................1103

1. Calculate BPT’s company after-tax WACC, rounded to four decimal places.ParticularsAmountCost of debt Interest-bearing debt $44800Amount of debt Tax rate 30%Cost of Debt (kd)I(1-t)/Amount of debt $44800(1-30%)/44800Cost of Debt (kd)70%Cost of equityRisk free rate2.7%Market risk premium6%Beta0.95Risk free return+Beta(market rate of return-risk free return(market risk premium))2.7%+0.95(6%)8.4%Calculation of WACC after taxParticularsAmount(in $000)After tax costWACCDebt 4480070%31360Equity 1920018.4%16128.084Total23680147488.084WACC47488.084/23680120.054%2. Calculate RV Division WACC using the method in paragraph 6.ParticularsAmountBook valueweightsAfter tax costWACCDebt 448000.1970%0.133Equity1920010.8115.3%(W.N.1)0.12393Total2368011.000.2569303

WACC25.693%Working noteW.N.1Cost of equityRisk free rate2.7%Market risk premium6%Beta2.1Risk free return+Beta(market rate of return-risk free return(market risk premium))2.7%+2.1(6%)15.3%(divisional cost of equity)3. Was the business risk of RV Division higher than, lower than or equal to its industrycompetitors if industry equity beta and RV divisional equity beta were the same as 2.10?Explain.In the current case scenario, equity beta of 2.10 shows higher volatility in the market astheir share will increase or decreases in the market (Greene, 2015). If industry beta and RVdivisional beta will equal to 2.10 then the business risks of RV division is higher than all thecompetitors as increasing equity beta of industry is due to the efforts applied by the RV division.4. Complete Table 1 fully, in accordance with the given assumptions, to show how the free cashflow in year 1 to year 6 is derived.ParticularsYear 1Year 2Year 3Year4Year5Year6Total revenue$22,000$23,210$24,487 $25,833 $26,737 $27,647 Cost of Goods Sold14,100 12,826 13,52814,26814,76615,266 Gross profit7,900 10,385 10,95911,56511,97212,381 Selling, general and administrativeexpenses(1,000)0 7,750 7,754 7,741 Earnings before interest, taxes,depreciation & amortization (EBITDA)6,900 10,385 10,9593,815 4,218 4,640 Depreciation and amortization1,000 1,100 1,200 1,300 1,400 1,500 Earnings before Interest and taxes5,900 9,285 9,759 2,515 2,818 3,140 03

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