FIN201: Corporate Finance

CORPORATE FINANCE
STUDENT ID:
[Pick the date]

Question 1
PART A
For finding the annuity present value, the following formula can be deployed (Damodaran,
2015).
Taking into consideration the information provided, the following inputs are evident.
P = $3,600, r= 12% p.a. or 1% per month, n = 2 years or 24 months
Substituting the above inputs in the formula stated above, we get present value of annuity =
3600*(1-1.01-24)/0.01 = $ 76,476.19
PART B
The information provided in regards to the bonds is summarised as shown below.
a) With regards to simple interest, the interest does not alter and remains the same.
As a result, interest that the company would pay over a 12 year period = 10000*(10/100)*12
= $ 12,000
b) In the given case, the interest is compounded and hence the quantum of the same would
increase on an annual basis. The total interested paid by the company on the bonds over a 12
year period would be equal to the FV (Future Value) of annuity of $ 1,000 payments at the
end of 12 years. The appropriate formula is listed below.

The relevant inputs for the above formula are as follows.
P = $1,000, r=10%, n =12,
PART C
Equity (Market value) = $46.6 million
Long term debt (Market value) = $35 million
Preference shares (Market value) = $ 10.3 million
Deployed capital = 46.6 + 35 + 10.3 = $ 91.9 million
Equity weight = (46.6/91.9) = 0.507
Long term debt weight = (35/91.9) = 0.381
Preference shares weight = (10.3/91.9) = 0.112
Equity cost = 12% p.a.
Long Term cost (post-tax) = 8%*(1-0.3) = 5.6% p.a
Preference shares cost = 10%
Question 2
a) For determining the feasibility of Project A, we need to compute the NPV (Net Present
Value) of this project by considering the 20% required return on the investment.