UB MGF 301 - MGF_A5 (2 pages)

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MGF_A5

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MGF_A5

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Pages:
2
School:
University at Buffalo, The State University of New York
Course:
Mgf 301 - Corporation Finance
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Unformatted text preview:

1 Number of shares outstanding 80 000 000 book value 20 per share 4 000 000 Market Value of WTC 35 4 000 000 140 000 000 Market Value of Debt 40 000 000 1 1 44 000 000 Expected Return on Stock 0 01 1 15 0 08 0 01 0 0905 Market Value Assets 140 000 000 44 000 000 184 000 000 Market WACC 140 000 000 184 000 000 0 0905 44 000 000 184 000 000 10 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 this information 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 0909 Pounds 8 000 34 1 2 326 400 Yen 10 000 000 110 90909 09 After UK investment decreased 10 Worth 8 000 34 0 9 244 800 pounds Today s rate 244 800 1 27 310 896 dollars After Japanese investments increase by 1 Worth 10 000 000 1 01 10 100 000 Yen Today s rate 10 100 000 113 56 88939 768 Dollars b 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 Pesos Initial Investment 4 200 000 dollars Sales per year 2 900 000 Depreciation 4 200 000 5 840 000 Annuity factor 5 yrs 10 3 791 Cost per year 7 000 000 20 68 338491 2959 dollars Operating Income sales cost 2 900 000 338491 2959 2561508 7041 Taxable income 2561508 7041 840 000 1721508 7041 Taxes 1721508 7041 0 35 602528 046 1721508 7041 602528 046 1118980 658 free cash flow 1118980 658 840 000 1958980 658 NPV 1958980 658 3 791 4200000 3226495 6732

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