1. Number of shares outstanding=80,000,000 book value/20 per share=4,000,000Market Value of WTC = 35*4,000,000=140,000,000Market Value of Debt=40,000,000*1.1=44,000,000Expected Return on Stock=0.01+1.15*(0.08-0.01)=0.0905Market Value Assets= 140,000,000+44,000,000=184,000,000Market WACC=(140,000,000/184,000,000)*0.0905+(44,000,000/184,000,000)*(1-0.35)*0.065=0.06886+0.010103=0.07896=7.896%2. a) If the firm is financing a new project with the same debt and equity of the overall firm, the method of WACC would be the best fit. However, in this case, this company is trying to issue either equity or debt to finance for the new expansion project. Thus, it changes the portions and the ratio of equity or debt in WACC formula. We do not use WACC formula in this case. Instead, using the method of solving for the risk of performing the new project, which is the beta assets for their business, and then use thisinformation to calculate CAPM to find the discount rate. b) The expansion plan in this case is a new product line that is unrelated to the existing products. A brand-new product line to the company requires the company to find the Beta assets through either exploring other companies’ Beta assets in this new line industry, or try to found the estimate Beta assets in industry figures. 3. a) Initial Investment: Portfolio: 8,000*34*1.2+10,000,000/110=326,400+90909.09=417,309.0909Pounds: 8,000*34*1.2=326,400Yen: 10,000,000/110=90909.09After UK investment decreased 10%:Worth: 8,000*34*0.9=244,800 poundsToday’s rate: 244,800*1.27=310,896 dollarsAfter Japanese investments increase by 1% Worth: 10,000,000*1.01=10,100,000 YenToday’s rate: 10,100,000/113.56=88939.768 Dollarsb) Overall rate of return=[(310,896+88939.768)- 417,309.0909]/ 417,309.0909 =-0.04187= -4.187%4) Toady’s rate: 1 Dollar = 20.68 PesosInitial Investment: 4,200,000 dollarsSales per year: 2,900,000Depreciation: 4,200,000/5=840,000 $Annuity factor (5 yrs, 10%): 3.791Cost per year: 7,000,000/20.68=338491.2959 dollarsOperating Income: sales –cost=2,900,000-338491.2959=2561508.7041 $Taxable income: 2561508.7041-840,000=1721508.7041Taxes: 1721508.7041*0.35=602528.046$1721508.7041-602528.046=1118980.658$free cash flow:
View Full Document
Unlocking...