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1.What is the WACC (Weighted Average Cost of Capital) for BRK based on the information given here:BRK’s cost of equity was 9.2%, which reflected a beta of 0.90, an expected market return of 9.90%, and a risk-free rate of 2.89%. The yield on corporate bonds rated AA was 3.95%—and after a 39% expected marginal tax rate, the cost of debt would be 2.3%. Weights of capital were 16.9% for debt and 83.1% for equity. In contrast, the beta for PCP was 0.38. Analysts expected that PCP’s cash flows would grow indefinitely at about the long-term expected real growth rate of the U.S. economy, 2.5%.
2.NBT Ltd plans to invest in a project with three years' life and will finance the initial investment using $3m debt plus $2m equity. NBT will repay $1 million debt at the end of each year until it is fully repaid. Other important information is provided in the table below. Calculate the adjusted present value (APV) of the project. (8 marks) cost of debt Asset beta (unlevered firm beta) Market risk premium Risk free interest rate Free cash flow (unlevered) 8% 1.2 6% 4% $3m 10% 0
PART B: SHORT PROBLEMS (30 Marks) Problem 1 (12 marks) (a). NIT is going to adjust its current Debt/Equity ratio from 1.5 to 2. Using the information in the below, calculate the cost of equity of NIT after the capital restructure. If D/E=1.5 If D/E=2 Cost of debt 6% 6.5% Cost of equity ? 30% 30% Tax rate 012%
3.Y3K, Inc., has sales of $4,600, total assets of $3,425, and a debt-equity ratio of 1.30. If its return on equity is 16 percent, what its net income?
4.Busy Ben Carpenters (Pty) Ltd buys the wood used in the factory from Western Wood (Pty) Ltd on the following terms:
Purchases: R500,000
Terms: 1/10, 30 net Payment: Only on day 45 Required:
2.1 What is the EAR (Effective Annual Rate) on the trade credit?
5.The Maurer Company has a long-term debt ratio of .60 and a current ratio of 1.60. Current liabilities are $970, sales are $5,150, profit margin is 9.30 percent, and ROE is 18.00 percent. What is the amount of the firm's net fixed assets?
6.Pop Evil, Inc.'s, net income for the most recent year was $10,146. The tax rate was 24 percent. The firm paid $3,430 in total interest expense and deducted $2,195 in depreciation expense. What was the cash coverage ratio for the year?
1.
| Weight of equity = 1-D/A |
| Weight of equity = 1-0.169 |
| W(E)=0.831 |
| Weight of debt = D/A |
| Weight of debt = 0.169 |
| W(D)=0.169 |
| After tax cost of debt = cost of debt*(1-tax rate) |
| After tax cost of debt = 3.95*(1-0.39) |
| = 2.4095 |
| WACC=after tax cost of debt*W(D)+cost of equity*W(E) |
| WACC=2.41*0.169+9.2*0.831 |
| WACC =8.0% |
2.
| a. Problem1 -NIT |
| First, we need to find the cost of unlevered equity |
| Cost of levered equity=Cost of Unlevered equity+(Debt/equity)*(1-Tax rate)*(Cost of Unlevered equity-Cost of Debt) |
| ie. Re=ro+(D/E*(1-Tc)*(ro-rd) |
| ie.12%=ro+(1.5*(1-30%)*(ro-6%) |
| Solving for ro, ie. Cost of Unlevered equity, we get, |
| 8.93% |
| With this , we will use the same formula as above , to find the cost of equity, in the debt-increased firm--both cost & weight |
| ie. Re=ro+(D/E*(1-Tc)*(ro-rd) |
| re=8.93%+(2*(1-30%)*(8.93%-6.5%))= |
| 12.33% |
| (Answer) |
| b. NBT Ltd. |
| Cost of Unlevered equity, as per CAPM, |
| RFR+(Unlevered Beta*Market risk premium) |
| ie. 4%+(1.2*6%)= |
| 11.20% |
| Adjusted present value of the project= |
| PV of Unlevered FCF discounted at unlevered cost of Equity+ sum of PV of all 3 yrs.' debt tax shields, discounted at gross cost of debt,8% |
| ie. (3*2.43524)+(30%*3*8%/1.08^1)+(30%*2*8%/1.08^2)+(30%*1*8%/1.08^3)= |
| ie. 7.305720+0.066667+0.041152+0.019052= |
| 7.432591 |
| millions |
| (Answer) |
| or $ 7.43 m |
| NOTE: P/A, F---(1-1.112^-3)/0.112= 2.43524 |
3.
Return on equity is the ratio of net income to the value of equity, and measures dollar return per dollar of shareholders' equity. This rate of return also determines the maximum growth a firm can sustain with its existing capital structure.
Given:
Sales = $4,600
Total Asset = $3,425
DE ratio = 1.30
ROE = 16%
Using Dopont analysis - Net profit margin *Asset Turnover * Equity Multiplier
1) Asset Turnover = Sales/Assets = $4600/$3425 =1.34
2) Equity multiplier = 1+Debt to equity ratio = 1+1.30 = 2.30
3) Profit Margin =RoE/asset turnover *Equity multiplier
=0.16/(1.34*2.30)= 5.19%
4) Net income = Sales * profit margin
= 4600* 0.0519
= 238.80 - answer
4.If the buyer pays within 10 days it receive 1% discount otherwise the full amount is due in 30 days.
The interest rate per period is 1/99 =1.01%.
If the firm delays payment till 45th day,it has use of funds for (45-10 =35)days beyond the discount period.
There are 365/35 =10.43 , 35 day periods in a year.
EAR = 1.1105 -1
=11.05%
Hence EAR on the trade credit is 11.05%
please see the attached file.
5.
| Sale | $ 5,150 | |
| Profit margin | 9.30% | |
| Profit= | $ 478.95 | 5150*9.3% |
| Return on equity= | 18% | |
| Equity= | 478.95/18% | |
| Equity= | $ 2,660.83 | |
| Long term debt | 0.60 | |
| Equity + Current liability= | 0.40 | 1-0.6 |
| Equity + Current liability= | 2660.83+970 | |
| Equity + Current liability= | $ 3,630.83 | |
| Total Assets= | 3630.83/0.40 | |
| Total Assets= | $ 9,077.08 | |
| Current ratio | 1.60 | |
| Current ratio= | Current assets/Current liabilities | |
| 1.60= | Current assets/970 | |
| Current assets= | 1.60*970 | |
| Current assets= | $ 1,552.00 | |
| Total assets= | Net Fixed asset+Current assets | |
| 9077.08= | Net Fixed asset+1552 | |
| Net fixed assets= | 9077.08-1552 | |
| Net fixed assets= | $ 7,525.08 |
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