Why Choose Us?
0% AI Guarantee
Human-written only.
24/7 Support
Anytime, anywhere.
Plagiarism Free
100% Original.
Expert Tutors
Masters & PhDs.
100% Confidential
Your privacy matters.
On-Time Delivery
Never miss a deadline.
Kanterbrew Kanterbrew is an international brewery firm
Kanterbrew Kanterbrew is an international brewery firm. It would like to invest in a new brewery in China for five years. Data on investment needs: Land (already owned at a historical cost of $ 2,000,000, but the market price is $5,000,000) A new plant for $ 10,000,000 A market research for $ 100,000 (already spent) Straight-line depreciation is used on 10 years. The brewery will be sold after five years ($ 3,000,000 for the land and $ 6,000,000 for the plant)
Data on cash flows: Sales will be $ 10,000,000 in year 1. Sales will increase by 30 % in year 2 and 3 and decrease by 10% in year 4 and 5 The cost of sales counts for 60% of the sales Administrative expenses will be $ 1,200,000 each year The corporate tax rate is 30% (the same for capital gains) Financial expenses will be $800,000 each year The account receivable counts for 15% of sales The inventory counts for 20% of sales The account payable counts for 10% of sales Working capital will be recovered in year 6
The Kanterbrew balance sheet looks as follows: Accounting value in the balance sheet Equity : $ 40,000,000 Assets: $ 60,000,000 Debt: $ 20,000,000
Data about finance: Risk-free rate: 3% Covariance between return on Kanterbrew's stock and return of a market index: 0.00243 Standard deviation of the return of a market index: 0.045 Expected return on the market index: 7,5% Number of Kanterbrew's shares listed on the market: 1,000,000 Kanterbrew's stock price: $80 Kanterbrew's debt is "in fine" with a maturity of 5 years The coupon rate is 4% with yearly payment based on a face value of $20,000,000. Repayment is at face value. Kanterbrew is graded A- by Standard and Poor's. The spread for this grade is 2.5%.
Year Question 1 land New plant Market research Initial investment cash flow Question Year 1 Year Cost of sales Gross profit - Administrative Depreciation - EBIT Corporatetas EDIT:11. To Depreciation Operating cash flow from the income statement Tero Years Teara Acce ineraries Accountable Working cam Change in Wall WoWCJ
Question Years Sale of the land Sale of the plant Tax on capital gairloss on the land Tax on capital gains on the plant Net tar on capital gain Net Inflow from divestment Question Cont of debt fiske free rate. Spread Future cash flows Present value le discounted future cash Market value of debt Questions First, we have to compute the beta col/vart) Cost of equity KR BRRR Market value of equity Question WACC cost of capital Question Investment cat flow Operating cash flow Cash flow from divestment - Cash Flow Discounted cash flow Net present value of the brewery
Expert Solution
Question 1:
| Particulars | Amount |
| Land (Refer Working Note 1 below) | NIL |
| New Plant | 10,000,000 |
| Market Research (Refer Working Note 2 below) | NIL |
| Initial Investment Cash Flow | 10,000,000 |
Working Notes :
1. Since land was already owned by the Kanterbrew, that implies no initial cash flows occured on the date of investment. Therefore, the amount of land is taken as NIL.
2. Amount has already been spent on the market research therefore it has been taken at NIL value.
Question 2 :
| Particulars | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| +Sales | - | 10,000,000 | 13,000,000 | 16,900,000 | 15,210,000 | 13,689,000 | - |
| -Cost of sales | - | 6,000,000 | 7,800,000 | 10,140,000 | 9,126,000 | 8,213,400 | - |
| =Gross Profit | - | 4,000,000 | 5,200,000 | 6,760,000 | 6,084,000 | 5,475,600 | - |
| -Administration Expenses | - | 1,200,000 | 1,200,000 | 1,200,000 | 1,200,000 | 1,200,000 | - |
| =EBIT | - | 2,800,000 | 4,000,000 | 5,560,000 | 4,884,000 | 4,275,600 | - |
| -Corporate Tax | 30% | 30% | 30% | 30% | 30% | 30% | 30% |
| EBIT*(1-tc) | - | 1,960,000 | 2,800,000 | 3,892,000 | 3,418,800 | 2,992,920 | - |
| +Depreciation (Refer WN 3) | - | 800,000 | 800,000 | 800,000 | 800,000 | 800,000 | - |
| =Operating Cash Flows from Income Statement | - | 2,760,000 | 3,600,000 | 4,692,000 | 4,218,800 | 3,792,920 | - |
Working Note 3 :
Calculation of Depreciation -
| Particulars | Amount |
| Original Cost | 10,000,000 |
| Salvage Cost | 6,000,000 |
| Annual Depreciation | 800,000 |
| Particulars | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| +Accounts Receivable | - | 1,500,000 | 1,950,000 | 2,535,000 | 2,281,500 | 2,053,350 | - |
| +Inventory | - | 2,000,000 | 2,600,000 | 3,380,000 | 3,042,000 | 2,737,800 | - |
| -Accounts Payable | - | 1,000,000 | 1,300,000 | 1,690,000 | 1,521,000 | 1,368,900 | - |
| =Working Capital | - | 2,500,000 | 3,250,000 | 4,225,000 | 3,802,500 | 3,422,250 | - |
| Change in working capital (WCn - WCn-1) | 2,500,000 | 750,000 | 975,000 | (422,500) | (380,250) | 0 (Refer below note) | |
NOTE :In year 6, entire working capital is released therefore, change in Working Capital is taken as NIL.
| Operating Cash Flows | 260,000 | 2,850,000 | 3,717,000 | 4,641,300 | 4,173,170 | 3,422,250 |
Question 3:
| Particulars | Year 5 |
| Sale of Land | 3,000,000 |
| Sale of Plant | 6,000,000 |
| Total sale proceeds (A) | 9,000,000 |
| Tax on capital gain/loss on the land (Working Note 4) | 300,000 |
| Tax on capital gain/loss on the plant (Working Note 5) | 1,800,000 |
| Net Tax on Capital Gain (B) | 2,100,000 |
| Net Inflow from Divestment (A-B) | 6,900,000 |
Working Note 4 :
| Particulars | Amount |
| Sale | 3,000,000 |
| Historical Cost | 2,000,000 |
| Capital Gain | 1,000,000 |
| Tax Rate | 30% |
| Tax on capital gain/loss | 300,000 |
Working Note 5 :
| Particulars | Amount |
| Sale | 6,000,000 |
| Written Down Value | - |
| Capital Gain | 6,000,000 |
| Tax Rate | 30% |
| Tax on capital gain/loss | 1,800,000 |
Question 4 :
Cost of debt (=Risk Free Rate + Spread ) : 5.5%
| Year | 1 | 2 | 3 | 4 | 5 |
| Future Cash Flows | 260,000 | 2,850,000 | 3,717,000 | 4,641,300 | 4,173,170 |
|
Present value (i.e. discounted future cash flows) Discounted at 7.28% (WACC as computed in Ques 5 and 6) |
242,320 | 2,476,650 | 3,010,770 | 3,504,182 | 2,937,912 |
Market value of debt = Present value of Interest payments discounted at 5.5% + Present value of principal repayment discounted at 5.5%
= 20,000,000*4%*PVAF( 5.5%, 5) + 20,000,000*PVIF (5.5%,5)
=800,000*4.270 + 20,000,000*0.765
=3,416,000 + 15,300,000
=18,716,000
Question 5 :
First we have to compute beta = Cov / Var() = 0.00243 / (0.045)^2
=1.2
Cost of Equity (ke) = Rf + (Rm - Rf)beta
= 3 + (7.5 - 3)*1.2
= 3 + 5.4
= 8.4%
Question 6 :
WACC Cost of Capital K =
K = (ke*Ve)/(Vd + Ve) + [kd(1-tc)*Vd] / (Vd + Ve)
=0.084*(80,000,000)/(20,000,000 + 80,000,000) + 0.04 (1-0.3)*20,000,000 / (20,000,000 + 80,000,000)
=0.0672 + 0.0056
= 0.0728
= 7.28%
Question 7 :
| Particulars | Year 0 | Year 1 | Year 2 | Year 3 | Year 4 | Year 5 | Year 6 |
| -Investment Cash Flow | (10,000,000) | - | - | - | - | - | - |
| +Operating Cash Flows (Refer Question 2) | - | 260,000 | 2,850,000 | 3,717,000 | 4,641,300 | 4,173,170 | - |
| +Cash Flow from divestment (Refer Question 3) | - | - | - | - | - | 6,900,000 | - |
| +Release of working capital (Refer Question 2) | - | - | - | - | - | - | 3,422,250 |
| Cash Flow | (10,000,000) | 260,000 | 2,850,000 | 3,717,000 | 4,641,300 | 11,073,170 | 3,422,250 |
| Discounted Cash Flows | (10,000,000) | 242,320 | 2,476,650 | 3,010,770 | 3,504,182 | 2,937,912 | 2,244,996 |
| Net Present Value of the Brewery | 1,697,860 |
Since Net Present Value of the Brewery is positive so it is advisable to invest in the Brewery.
Archived Solution
You have full access to this solution. To save a copy with all formatting and attachments, use the button below.
For ready-to-submit work, please order a fresh solution below.
