Albeit Asitis Corporation Case study 2022

Paula Morales
FIN304/1 Spring 2021
Final Exam
Student: Paula Morales
Course Leader: David Muir
Course: FIN304/1 Corporate Finance- Spring 2021
Date Due: Sunday 30th May 2021
Date Submitted: Sunday 30th May 2021
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Comments:
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Paula Morales
FIN304/1 Spring 2021
1. Data Q1
The Albeit Asitis Corporation is known for the high quality of its Snirfel Sprocket Inverters
internationally. It has undertaken to expand recently, and requires your assistance in
determining first the Weighted Average Cost of Capital, and the determination of a capital
budget for the purchase of a new machine which is expected to last about seven years.
To determine the WACC, the following information is helpful:
The calculation is done on the basis of total debt, short and long term, for which the
company pays 9%, and the Tax Rate is 25%
The company will determine the cost equity using the CAPM model, which is based on
the following information:
Standard deviation of the market – 5.00%
Standard deviation of Albeit - 7.00%
Covariance 43.75
T-bond rate – 3 month - 3.00%
Expected Market return - 12.00%
The Balance Sheet looks like this:
Albeit Asitis Corporation
December 31, 2020
Assets Liabilities
Cash 2,523 Operating Bank Loan 1,745
Accounts Receivable 5,636 Payables 3,256
Inventory 7,522 Current portion of LT loan 4,722
Current Assets 15,681 Current Liabilities 9,723
Machinery 58,200 Long term loan 20,875
Accumulated Depreciation 27,450- 30,750 Mortgage 72,200
Buildings 259,720 Bonds 50,000
Accumulated Depreciation 76,730- 182,990
Long Term Liabilities 143,075
Fixed Assets 213,740
TOTAL LIABILITIES 152,798
TOTAL ASSETS 229,421
Shareholder's Equity
Capital Stock 30,000
Retained Earnings 46,623
TOTAL SHAREHOLDER'S EQUITY 76,623
TOTAL EQUITY AND LIABILITIES 229,421

Paula Morales
FIN304/1 Spring 2021
a) Calculate the Debt/Equity and working capital (current) ratios. What is
your professional opinion, given that for the sector, the ratios are usually 3
and 1.2 respectively?
Debt Equity Ratio = Total long-term debt of the company / Shareholder’s fund
= 152798 / 76623 = 1.99
The debt-equity ratio of the company is currently at 1.99 but usually, the debt-equity
ratio of the companies is at 3 which shows that the company can have debt at 3 times
from the current level of equity but currently the company has only 1.99 times debt
of the shareholder's fund. That shows currently the company can increase its funds
with the debt at a cheaper cost, therefore the company should consider borrowing
funds from debt funds and bank financing.
Current ratio = Current assets / current liabilities
= 15681 / 9723 = 1.61
In the current case usually, a current ratio is 1.2, but the company has a current ratio
of 1.61 which means the company has excess working capital as compared to the
usual trend.
On accessing both conditions about the debt-equity ratio and the current ratio it can be
concluded that the company has excess funds with themselves and also the company
can increase the funds and invest the funds in the various opportunities ahead to the
company.
b) Calculate the WACC of the firm and explain what it is used for. How
would you tell the owners how this figure will help them?
Calculation of cost of equity
Beta of the stock = Covariance / Variance of market
Standard deviation of market = 5%
Variance of market = 25
Covariance = 43.75
Beta of the stock = 43.75 /25 = 1.75
Rf = 3 %
Rm = 12 %
E(r) = 3 + (12-3) * 1.75

Paula Morales
FIN304/1 Spring 2021
E(R) = 3 + 15.75 = 18.75 %
The average cost of debt = 9 %
Tax rate = 25 %
Cost of debt (after tax) = 9 * (1-.25) = 6.75 %
Calculation of weighted average cost of capital
WACC
Details Value Weights Cost WAC
C
Debt 152798 0,50 6,75 3,37
Equity 76623 0,33 18,75 6,26
229421 0,83 9,63
The weighted average cost of capital is the cost of funding to the company, it can be
work as a hurdle rate for any decision making, any investment opportunity if earns
below the weighted average cost of capital then the project should not be acceptable
by the company.
2. Data Q2
The firm is planning on starting a new operation which will last for about seven years. The
initial cash injection will be $35,000. The revenues for the seven years are expected to be:
1 2 3 4 5 6 7
13,000.0
0
14,000.0
0
17,000.0
0
18,000.0
0
20,000.0
0
25,000.0
0
20,000.0
0
The variable costs are 35%
The tax rate remains at 25%
Fixed costs are $2,500 per month
The company expects a recovery on concluding operations of $12,000. This amount is
taxable.