Financial Analysis and Risk Assessment

The assignment presents a comprehensive financial analysis of a gold mining company, incorporating features similar to operations of mining such as bond price, call option, and put option. The document also includes scenario-based calculations for different market conditions, resulting in net present value (NPV) outcomes for 1-year periods. Recommendations are provided based on the scenarios, with Scenario 3 yielding the highest outcome.

Corporate Finance

TABLE OF CONTENTS
QUESTION 1.......................................................................................................................................4
a. Computation of net cash flow .................................................................................................4
b. Assessing NPV as per the case situation ................................................................................5
c. Sensitivity analysis ..................................................................................................................6
QUESTION 2.......................................................................................................................................7
QUESTION 3.......................................................................................................................................8
a....................................................................................................................................................8
b...................................................................................................................................................9
QUESTION 4.......................................................................................................................................9
QUESTION 5.....................................................................................................................................10
QUESTION 6.....................................................................................................................................12
QUESTION 7.....................................................................................................................................14
A. Measuring WACC for MLC.................................................................................................14
B. Unlevered cost of capital:......................................................................................................16
C. Justifying the reason behind variations in equity costs of capital, unlevered costs of capital and WACC......................................17
QUESTION 8.....................................................................................................................................17

QUESTION 9.....................................................................................................................................18
QUESTION 10...................................................................................................................................21

QUESTION 1
a. Computation of net cash flow
Year 0
Year
1
Year
2 Year 4
Year
5
Year
6
Year
7
Year
8
Year
9 Year 10
Sales revenue
105.0
0
105.0
0 105.00
105.0
0
105.0
0
105.0
0
105.0
0
105.0
0 105.00
Manufacturing expenses other
than depreciation 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00 35.00
Marketing expenses 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00 10.00
Depreciation 16.00 16.00 16.00 16.00 16.00 16.00 16.00 16.00 16.00
Equals net operating income
$44.0
0
$44.0
0 $44.00
$44.0
0
$44.0
0
$44.0
0
$44.0
0
$44.0
0 $44.00
Minus income tax 15.40 15.40 15.40 15.40 15.40 15.40 15.40 15.40 15.40
Equals Unlevered Net income
$28.6
0
$28.6
0 $28.60
$28.6
0
$28.6
0
$28.6
0
$28.6
0
$28.6
0 $28.60
Plus depreciation 16.00 16.00 16.00 16.00 16.00 16.00 16.00 16.00 16.00
Additions to net working
capital (5.00) (5.00) (5.00) (5.00) (5.00) (5.00) (5.00)
(5.00
) (5.00)
Capital Expenditures (160.00)
Continuation value 12.00
Free cash flow
($160.00
)
$39.6
0
$39.6
0 $39.60
$39.6
0
$39.6
0
$39.6
0
$39.6
0
$39.6
0 $51.60

b. Assessing NPV as per the case situation
Computation of NPV
year Cash inflows PV factor @ 11% Discounted cash inflow
1 39.6 0.901 35.68
2 39.6 0.812 32.14
3 39.6 0.731 28.96
4 39.6 0.659 26.09
5 39.6 0.593 23.50
6 39.6 0.535 21.17
7 39.6 0.482 19.07
8 39.6 0.434 17.18
9 39.6 0.391 15.48
10 51.6 0.352 18.17
Total discounted cash inflows 237.44
Less: initial investment 160
NPV 77.44
Cost of capital 11.00%
NPV 77.44

c. Sensitivity analysis
Discount Rate NPV
NPV 77.44
5.00% 153.15
6.00% 138.16
7.00% 124.23
8.00% 111.28
9.00% 99.21
10.00% 87.95
11.00% 77.44
12.00% 67.61
13.00% 58.41
14.00% 49.80
15.00% 41.71
16.00% 34.12
17.00% 26.98
18.00% 20.26
19.00% 13.93
20.00% 7.96
21.00% 2.33
22.00% (3.00)
23.00% (8.03)
24.00% (12.80)
25.00% (17.32)

26.00% (21.60)
27.00% (25.67)
28.00% (29.53)
29.00% (33.21)
30.00% (36.70)
QUESTION 2
Calculation of NPV
Year Cash inflows PV factor @ 5% Present value of cash flows
1 25 0.952 23.81
2 25 0.907 22.68
3 25 0.864 21.60
4 25 0.823 20.57
5 25 0.784 19.59
6 25 0.746 18.66
7 25 0.711 17.77
8 25 0.677 16.92
9 25 0.645 16.12
10 25 0.614 15.35

Total discounted cash inflow 193.04
less: initial investment 150.00
NPV 43.04
Less: cost at perpetuity (2.2/.05) 44
Net value -0.96
IRR: From assessment, it has found that rule pertaining to IRR does not apply in the case of multiple variables
QUESTION 3
a.
G
i
v
e
n
E
s
t
i
m
a

t
e
d
o
r
p
r
o
j
e
c
t
e
d
Year 2 4 6 7 8 9 10 11
Free cash flow 48 68 74
76.9
6
80.0
4
83.2
4
86
.5
7 90.03
PV factor @ 16%
0.86
2
0.74
3
0.64
1
0.
55
2 0.476
Discounted cash flows
66.3
4
59.4
8
53.3
3
47
.8
1 42.87
Enterprise value (Sum of all the discounted cash
flows)
269.8
3
b.
Calculation of fair value

Particulars Figures (in €)
Enterprise value 269.83
Net debt 150
Fair value 119.83
Shares outstanding 40
Share price 2.99 or 3
QUESTION 4
Particulars
BHI’s equity 32*20 = £640
Debt level £64
Value of BHI 640 + 64 = 704
Beta assessment of BHI Equity value / total value (640 / 704)1.33 +(64/704)0 =
1.21
Burger’s holding 850 / 2 = £425
Value of soccer team Value of BHI – Value of BHI’s
share in BB
£704 – £425 = £279
Beta of BB .75
Equity beta of BB (850/1050)*β + (200/1050)0 =
0.75
Value of BHI’s investment in
BB is
50% * 850 million = 425
value of BHI’s investment in
Soccer Team
279 million
Beta value of soccer team (425/704) 0.93 +
(279/(425+279)) × β = 1.64

QUESTION 5
Capital Cost Allowance
Assumptions
Cost of Asset 72000000
Economic Life 6
Tax rate 40%
Discounte rate 17%
CCA rate of asset 9%
T-year
annuity of C/T
$17,378,
799.65
C*d*t/
(r+d)
100987
01.2987
013
(C*d*t/
(r+d))*(.5+.5/
(1+r))
100987
01.298
7013
PV of tax 28,800,0 PV of tax shields 12,445, PV of tax shields 6,951,9

shields 00.00 365.54 48.18
Straight-Line
Depreciation
Declining-
Balance
Depreciation
Declining
Balance with
half-year
Year Book value
Deprec
iation
Tax
Shield PV UCC CCA
Tax
Shield PV UCC CCA
Tax
Shield PV
1 72,000,000.00
12,000,
000.00
4,800,0
00.00
4,800,00
0.00 72,000,000.00
6,480,0
00.00
2,592,0
00.00
2,592,0
00.00 72,000,000.00
3,240,0
00.00
1,296,0
00.00
1,296,0
00.00
2 60,000,000.00
12,000,
000.00
4,800,0
00.00
4,800,00
0.00 65,520,000.00
5,896,8
00.00
2,358,7
20.00
2,358,7
20.00 68,760,000.00
3,094,2
00.00
1,237,6
80.00
1,237,6
80.00
3 48,000,000.00
12,000,
000.00
4,800,0
00.00
4,800,00
0.00 59,623,200.00
5,366,0
88.00
2,146,4
35.20
2,146,4
35.20 65,665,800.00
2,954,9
61.00
1,181,9
84.40
1,181,9
84.40
4 36,000,000.00
12,000,
000.00
4,800,0
00.00
4,800,00
0.00 54,257,112.00
4,883,1
40.08
1,953,2
56.03
1,953,2
56.03 62,710,839.00
2,821,9
87.76
1,128,7
95.10
1,128,7
95.10
5 24,000,000.00
12,000,
000.00
4,800,0
00.00
4,800,00
0.00 49,373,971.92
4,443,6
57.47
1,777,4
62.99
1,777,4
62.99 59,888,851.25
2,694,9
98.31
1,077,9
99.32
1,077,9
99.32
6 12,000,000.00
12,000,
000.00
4,800,0
00.00
4,800,00
0.00 44,930,314.45
4,043,7
28.30
1,617,4
91.32
1,617,4
91.32 57,193,852.94
2,573,7
23.38
1,029,4
89.35
1,029,4
89.35

QUESTION 6
Assumptions
Cost of Asset 50000000
Economic Life 6 years
Tax rate 30%
Discounte rate 3%
CCA rate of asset 8%
T-year
annuity of
C/T
$13,77
0,313.4
0
C*d*t/
(r+d) 11250000
(C*d*t/
(r+d))*(.5+.5/
(1+r)) 11250000

PV of tax
shields
15,000,
000.00
PV of tax
shields
5,604,029
.26
PV of tax
shields
3,073,975
.75
Straight-
Line
Depreciation
Declining-
Balance
Depreciation
Declining
Balance with
half-year
Year Book value
Deprec
iation
Tax
Shield PV UCC CCA
Tax
Shield PV UCC CCA
Tax
Shield PV
1
50,000,000.0
0
8,333,
333.33
2,500,
000.0
0
2,500,0
00.00 50,000,000.00
3,750,
000.0
0
1,125,
000.0
0
1,125,000
.00 50,000,000.00
1,875,
000.0
0
562,5
00.00
562,500.0
0
2
41,666,666.6
7
8,333,
333.33
2,500,
000.0
0
2,500,0
00.00 46,250,000.00
3,468,
750.0
0
1,040,
625.0
0
1,040,625
.00 48,125,000.00
1,804,
687.5
0
541,4
06.25
541,406.2
5
3
33,333,333.3
3
8,333,
333.33
2,500,
000.0
0
2,500,0
00.00 42,781,250.00
3,208,
593.7
5
962,5
78.13
962,578.1
3 46,320,312.50
1,737,
011.7
2
521,1
03.52
521,103.5
2
4
25,000,000.0
0
8,333,
333.33
2,500,
000.0
0
2,500,0
00.00 39,572,656.25
2,967,
949.2
2
890,3
84.77
890,384.7
7 44,583,300.78
1,671,
873.7
8
501,5
62.13
501,562.1
3

5
16,666,666.6
7
8,333,
333.33
2,500,
000.0
0
2,500,0
00.00 36,604,707.03
2,745,
353.0
3
823,6
05.91
823,605.9
1 42,911,427.00
1,609,
178.5
1
482,7
53.55
482,753.5
5
6 8,333,333.33
8,333,
333.33
2,500,
000.0
0
2,500,0
00.00 33,859,354.00
2,539,
451.5
5
761,8
35.47
761,835.4
7 41,302,248.49
1,548,
834.3
2
464,6
50.30
464,650.3
0
QUESTION 7
A. Measuring WACC for MLC
Project or Acquisition
DATA % Debt 7%
% Equity 9%
Tax rate 35%

RESULT 1+ (1-T)D/E 1.54
Unlevered project beta 2.60
= average of unlevered
equity betas of
comparable firms
Project equity beta 3.99
DATA Risk-free rate 1.26%
= yield on long-term
Treasury bonds
Market risk premium 3.98%
= historical average
excess return of FTSE
100
RESULT Project equity beta 3.99
Market risk premium 3.98%
Equity risk premium 15.89%
Plus risk-free rate 1.26%

Cost of equity 17.15%
DATA Cost of debt 7.0%
RESULT Weighted
Weights Cost
After-tax cost of debt 4.6% 7.0% 0.3%
Cost of equity 17.1% 8.5% 1.5%
Weighted average cost of
capital 1.8%
B. Unlevered cost of capital:
assets beta equity beta 8.50%
0.03159851
3

[1+(1-tax rate)* debt/equity)] 2.69
Risk free rate 1.26
Expected market rate of
return 0.0398141264
Unlevered cost of capital risk free rate + unlieverd beta* (expected market return – risk free rate) 1.2214439408
RESULT 1+ (1-T)D/E 1.54
Unlevered project beta 2.60 = average of unlevered equity betas of comparable firms
Project equity beta 3.99
C. Justifying the reason behind variations in equity costs of capital, unlevered costs of capital and WACC
In relation with ascertaining the impacts of various operational outcomes which highlights the unlevered cost of capital as
1.2214 and WACC for 7.68% and on weights it was 17.66%. On the other side the equity cost of capital was 8.50%. Thus, reason
behind such variations are because of corporate tax rates and the market risk free rates.

QUESTION 8
Sub question
Per share
Underlying price 3
Exercise price 3
a Maximum possible price of call option 0
Per share
Underlying price 3
Exercise or strike price 3.5
b Maximum possible price of put option 0.5
Per share
Underlying price 3
Exercise or strike price 2.8
c Minimum possible price of put option 0

Per share
Underlying price 3
Exercise or strike price 3.5
d Minimum possible price of American put option 0.5
QUESTION 9
Given Current price 60
After 1 year 90 40
Interest rate 5.00% 57
Dividends 0
A Portfolio
U * S 90 (Up)

1.5
Current price 60
0.67
D * S 40 (Down)
90 (Up) 27
60 (Current price) 60 (Current price)
40 (Down) 0
Stock Option
B
S 60
u 1.5
d 0.67

K 63
r 5.00%
Cu 27
Cd 0
delta=(Cu-Cd)/(u-d)/S
Delta 0.5421686747
B=(u(Cd)-d(Cu))/((u-d)*(1+r) -18.09
0.8715
B -20.7573149742
Hence C = Delta*S + B
11.7728055077
C
Stock price today (s0) 60

Strike price (X) 63 500
up premium 90
Down premium 40
Time to expire 1 year
risk free rate 1.26 (As on 5 July)
Stock price today < Strike price
strike price 63 63
Call option 0 0
Total 63 63
Underlying price 90 40
put option 0 3
Total 90 43