Key Input Information
Growth Investment
I Growth Plans
POPLAR Ltd. is for now real - a combination of growth potential businesses with access to financial capital.
The founders and yourself have undertaken a thorough review of next steps for growth keeping in mind that
as they grow the focus of competitors on the Company will intensify. As well, overall economic conditions
are expected to weaken over the next XXXXXXXXXXmonths.
After a series of meetings, discussing strategic strengths, weaknesses, opportunities and threats - externally
and internally, the Board and Management agreed to pursue a growth plan for existing business as well as
from external acquisitions. A long-term target WACC was determined using a 5 year plan and a five year goal
for Debt as a % of total assets to be no more than 40% of total assets.
An additional outcome of these meetings was five options for consideration - three to enable growth
by increasing existing production capacity and two through the purchase of an operating division
of a competitor. You have been tasked with the financial evaluation of each option to determine which
productive option and business acquisition option should be chosen. Only one of each can be managed at
this time.
As noted above, your task is to assess the alternatives and determine which two should be pursued.
The required information for analysis is found below and on the tabs marked the colo
You will input the key information in the relevant tabs marked
You are to only enter figures or comments in the areas marked
It is highly recommended that you save the original information as a separate file in the event you have to
start over.
REQUIREMENT: You must complete this analysis - 2 A in order to move on to Phase 2 B - Refinancing as
accepted projects are used to determine what the refinancing steps are required. Frequent
communication with your senior manager is recommended.
Other key assumptions arising from the meetings are listed below. You must calculate the Target WACC
to determine the acceptable range for project evaluation and future financing goals.
See below for the pro-forma long-term funding objectives.
FNCE 390
Project Information - Phase 2 - Growth Investments
Other Strategic Decision Matters
A) Debt
1) Venture demand loan can be used as a demand loan provided it does not exceed 75% of accounts receivable.
Long-term Interest rate = Prime + 3.0% = 8.0%
2) Term loan repayable will now be repayable over 5 years in equal installments. Interest rate adjusted
to 8.5% over five year term.
Maximum bo
owing is 35% of Equipment
3) Amended Mortgage to be repayable over 25 years - 7.75% per annum - locked for 5 years
Maximum bo
owing is 70% of Land and Buildings
4) Refinance term loan - to be completed when transactions completed
- Interest rate proposed 10.00%
- Maximum bo
owing capacity $15,000,000
- Repayment 10 years equal principal payments
B) Equity
Shares issued and outstanding 5,200,000 Pre-split - consider when refinancing
Share price - based on Year 1 EBITDA X Multiplie
EBITDA - Board approved financials 2,811,932 Determine from Board approved financials
Multiplier 7.00
Cu
ent market value $ 19,683,524
Share price $ 3.79 Pre-split - consider when refinancing
Dividends $ - 0
Cost of Equity Long Range Target 21.00%
Assumed to remain constant for transactions planned
Minimum ownership position - founders 52%
Venture capital share price "discount" 28.00%
Private placement market price $ 3.00 Pre-split - consider when refinancing
C) Other information
Tax Rate - Pro-forma Years (future) 25% Use for target WACC
Risk premiums
- Equipment 4.00%
- Business acquisitions 6.00%
D) WACC
Target WACC 15.50% from Target WACC ta
Range of Tolerance for Next Year + / - 1.0% Range for 2B
Low
14.50%
High
16.50%
Target WACC
GREENGO Ltd.
Growth Plan - Target Financing and WACC
Target Weighted Average Cost of Capital
As Is
Capital Item $ Value Weighted Pre-Tax After-Tax Weighted
Targets Average Return Return Component
End of five years forecast Pre-tax X XXXXXXXXXXtax rate) Weighted Average X After Tax Return
Tax Rate
Venture demand loan 9,000,000 9% 0% 0.00%
Term loan payable 13,000,000 13% 0.00% 0.00%
Refinance term loan 6,000,000 6% 0.00% 0.00%
Mortgage payable 12,000,000 12% 0.00% 0.00%
Share capital 30,000,000 30%
Retained earnings 30,000,000 30%
Total Net Assets 100,000,000 100%
Round Up Cell G17 to nearest .5% - eg .11.34 = 11.5
Debt as % of Total Net Assets
Equity as % of Total Net Assets
Note: The Capital Base outlined above includes the working capital balance of the business - which is the
net balance of cu
ent assets minus cu
ent liabilities.
Project - Equipment A
FNCE 390
POPLAR Ltd. Project Information
A Equipment Acquisition Revenue (Cost) - $ Capital Budgeting
Evaluation of Option costs (300,000)
Selected Option - Equipment Investment Summary
Purchase Cost $ (3,120,000)
Delivery Cost (370,000)
Install and Commissioning (650,000)
Total Cost of Asset $ (4,140,000)
Working Capital Investment - Year 1
Accounts Receivable (560,000) Additional Permanent "Investment"
Inventory (510,000)
(1,070,000)
Equipment Life 20 Years
Salvage / Disposal Value 65,000
Amortization straight line
Annual Amortization 203,750
Incremental Benefits of Investment Per annum
Revenues Years XXXXXXXXXXand XXXXXXXXXX $ 3,400,000
Product costs XXXXXXXXXXand XXXXXXXXXX (2,312,000)
Revenues Years XXXXXXXXXX $ 4,000,000
Product costs XXXXXXXXXX (2,720,000)
Operating savings - all years 300,000 reduce General and Admin
Tax benefit
Tax depreciation method Capital cost - straight line 15 years
Capital Cost - Equipment 4,140,000
Tax depreciation term 15
Annual tax benefit 276,000
Tax Rate
Year 1 - 3 26% Per cu
ent Government budgets
Year 4 - 10 25% Per cu
ent Government budgets
Hurdle Rate
WACC - Target 15.50%
Risk Premium 4.00%
19.50%
Cap Bud - Equipment A
Capital Budgeting / Business Valuation
Solution Template - Discounted Cash Flow
Year Year Year Year Year Year Year Year Year Year Yea
0 1 2 3 4 5 6 7 8 9 10
Critical Inputs Project time frame
Weighted Average Cost of Capital (WACC) + Project Risk Premium = Required Project Return (Hurdle Rate) =
Income tax rate by yea
Input items
Cash Outflows - Investment
Initial Investment - Year 0
Subsequent Investments - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Total - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Project Net Cash Flows - Project Operations
Revenues - Inflows
Operating Costs - Outflows
Other Cost Savings - Inflows
Other - Tax Depreciation
Total Undiscounted Pre-Tax Net Cash Flows - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Tax Rate 26% 26% 26% 25% 25% 25% 25% 25% 25% 25%
Less: Taxes - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Add: Tax Depreciation - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Total Undiscounted After-Tax Net Cash Flows - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Terminal Value - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Total Undiscounted Cash flow - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Discount Rate = 1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
Discounted Net Cash Flows - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Total NPV - 0
Conclusion:
Payback =
IRR =
Business - Acquisition A
FNCE 390
POPLAR Ltd. Project Information
A Business Acquisition Revenue (Cost) - $ Capital Budgeting
Evaluation of Option costs (800,000)
Selected Option - Investment
Accounts Receivable $ 3,600,000
Inventory 3,075,000
Equipment 9,500,000
Land 1,750,000
Building 3,000,000
Assets Acquired 20,925,000
Liabilities Assumed
Accounts Payable (2,035,000)
Mortgage (1,540,000)
(3,575,000)
Venture Short Term Loan $ 17,350,000
Building Remaining Life 20 Years
Salvage Value 600,000
Amortization straight line
Annual Amortization $ 120,000
Equipment Life 20 Years
Salvage Value 1,050,000
Amortization straight line
Annual Amortization $ 422,500
Base + Incremental Revenue - Last Year 14,500,000
Terminal Value Multiple 1.20 Terminal value
Terminal Value 17,400,000
Incremental Benefits of Investment Per annum
Revenues XXXXXXXXXX $ 13,000,000
Product costs XXXXXXXXXX (7,150,000)
Revenues XXXXXXXXXX $ 14,000,000
Product costs XXXXXXXXXX (7,700,000)
Incremental revenues - cu
ent business 500,000
Incremental product costs - cu
ent (350,000)
Tax benefit - Buildings and Equipment
Tax depreciation method Net capital cost - straight line 20 years
Capital Cost 9,500,000
Tax depreciation term 20
Annual tax benefit 475,000
Tax Rate
Year 1 - 5 26% Per cu
ent Government budgets
Year 6 - 10 25% Per cu
ent Government budgets
Hurdle Rate
WACC - Target 15.50%
Risk Premium 6.00%
21.50%
Cap Bud - Acquisition A
Capital Budgeting / Business Valuation
Solution Template - Discounted Cash Flow
Year Year Year Year Year Year Year Year Year Year Yea
0 1 2 3 4 5 6 7 8 9 10
Critical Inputs Project time frame
Weighted Average Cost of Capital (WACC) + Project Risk Premium = Required Project Return (Hurdle Rate) =
Income tax rate by yea
Input items
Cash Outflows - Investment
Initial Investment - Year 0
Subsequent Investments - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Total - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Project Net Cash Flows - Project Operations
Revenues - Inflows
Operating Costs - Outflows
Incremental Revenues - Inflows
Incremental Expenses - Outflows
Other - Tax depreciation
Total Undiscounted Pre-Tax Net Cash Flows - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Tax Rate
Less: Taxes - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Add: Tax Depreciation - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Total Undiscounted After-Tax Net Cash Flows - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Terminal Value
Total Undiscounted Cash flow - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Discount Rate = 1 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000 1.0000
Discounted Net Cash Flows - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0 - 0
Total NPV - 0
Conclusion:
Payback =
IRR =