Sheet1 Data from Financial Statements Particulars 2020 2021 Current Assets 128,950,000 144,975,000 Inventories 112,000,000 127,000,000 Current Liabilities 132,524,000 144,002,000 Long-term...

Sheet1
    Data from Financial Statements
    Particulars    2020    2021
    Cu
ent Assets    128,950,000    144,975,000
    Inventories    112,000,000    127,000,000
    Cu
ent Liabilities    132,524,000    144,002,000
    Long-term debt    115,000,000    130,000,000
    Total Owner's equity    169,426,000    170,473,000
    Net Income    N/A    9,045,000
    Financial Ratios
        2020    2021
    1. Working Capital Ratio    0.97    1.01
    2. Quick Ratio    0.13    0.12
    5. Debt-Equity Ratio    0.68    0.76
    6. Return on Equity    N/A    5.31%
    Capital Asset Pricing Model (CAPM)
    Expected market return    6.00%
    Risk-free rate    2.00%
    BEB Beta    1.20
    Rate of Return    6.80%

FIN 620 Lon-Term Financial Management
Task 2
Capital Structure and Weighted Average Cost of Capital:
In this task, we are examining the cu
ent capital structure of BEB and determine the WACC of the company. Assume that BEB’s tax rate is 36%.
To compute the WACC you must first find the after-tax cost of debt, the cost of equity, and the proportions of debt and equity in the firm. You can assume that the cost of debt before tax is 7.5% for the firm. Please clearly show how you derive each of these values:
The after-tax cost of debt =
Cost of equity = (from your previous task)
Proportions of debt and equity in the firm (from the balance sheet) =
How do we compute the WACC in this circumstance? Why do we need to be concerned with the WACC?
Any insights into the capital structure of BEB ?
Concept Check:  Capital structure for a public company consists of both debt and equity. We must take into account the ability to write off interest payments in the calculation of our cost of debt which results in an after-tax cost of debt being used in our WACC calculation.
The weighted average cost of capital is the weighted average of the cost of equity and the after-tax cost of debt. Another way of looking at this is by computing the effect of the capital structure on expected returns by investors.
WACC= (S/(B+S) x Rs) + (B/(B+S) x RB x (1 – tc))
Where
S = value of equity
B = value of debt
Rs = cost of equity
After tax cost of debt:  RB x (1 – tc )
 
Helpful Hint: One thing to
ing up here is WACC is needed to determine risk on several levels. To determine risk we need to remember the following items:
1. Risk is a deviation from expectations.
2. We need to set expectations for our investments based on risk and return. Higher risk = higher return.
3. Capital is obtained from the marketplace in two forms; equity and debt. This is the capital structure of a corporation and impacts the profits of a company depending on how this is managed.
4. We use our cost of capital to discount any cash flows from new investments (NPV and IRR analysis).
5. If the cost of capital rises then our risk rises and the projects we undertake to increase sales and return to our investors are reduced.
6. If debt rises then our obligation to make payments on interest increases and profits can decrease if sales do not increase rapidly enough.
7. If risk increases our beta will increase to show the increase in risk. This will increase our required rate of return to stockholders (CAPM) and thus increase our required rate of return we must use in discounting future cash flows.
Task 3
To illustrate and further support our strategic financial planning systems we need to show the CFO and management team an example of the application of the previously constructed WACC. The CFO thinks that showing management how we can validate and choose projects based on expected returns developed from the WACC will help reduce the risk of our investor’s capital thus lowering the required rate of return we would have to provide to those investors. If we lower our expected return we can then do more projects and grow at a faster rate.
 
He has asked your team to evaluate the following project:
 
Capital investment: BEB is planning the construction of a new loading ramp for its single mill.  The initial cost of the investment is $600,000, followed by an investment of $200,000 10 years later and another investment of $200,000 20 years later and finally an investment of $1,000,000 for environmental cleanup at the end of the project 30 years from now.  Efficiencies from the new ramp are expected to reduce costs by $50,000 per year (at the end of every year) for the life of the plant, which is cu
ently estimated at 30 years (savings of $50,000 a year from 30 years). These savings can be assumed to be reinvested at a rate of 9% pa. What is the NPV of the project if BEB has a required rate of return of 7%? What is the MIRR of the project if the investing return rates (with the loading ramp used as collateral) for a period of 10 years is 6% pa and the term structure of investing return rates for Y years (Y > 15) is 6% XXXXXXXXXX*(1 - (1/(Y-9)) pa? You should use these investing return rates to discount back (to the present) the future investments that the loading ramp needs.
Concept Check:  We need to adjust cash flows to account for things like inflation, our cost of capital, and opportunity costs. Simply looking at cash flow not adjusted for some of these costs will lead to taking on projects which are not adding to the value of the organization.
Helpful Hint: The first step in conducting an NPV analysis is to include all the relevant cash flows. This includes savings from taxes and any expenses directly related to the venture. We reject any project with a negative NPV.

Task 2
    Given:
    Tax Rate    36%
    Cost of debt before tax     7.50%
    Long-Term Debt    130,000,000.00
    Cu
ent Portion of LT Debt    5,350,000.00
    Total Debt    135,350,000.00
    Cost of Equity    6.80%
    Total Owner's equity    $170,473,000.00
    Calculations:
    After-tax cost of debt     Cost of debt before tax *(1-Tax Rate)
    After-tax cost of debt     4.800%
    Proportions of debt and equity in the firm
    Particular    Amount    Weight
    Total Debt    $135,350,000.00    44.26%
    Total Owner's equity    $170,473,000.00    55.74%
    Total    $305,823,000.00    100.00%
    We compute the WACC in this circumstance by multiplying the weight of each source of Capital with its Cost. Because the WACC is used to assess the present value of future cash flows, it is extremely essential. If the WACC is low (as it is here), it is a favourable sign since it indicates that future cash flows are more valuable.
    Calculation of WACC
    Particular    Weight    Cost    WACC
    Total Debt    44.26%    4.80%    2.12%
    Total Owner's equity    55.74%    6.80%    3.79%
    Total    100.00%        5.91%
    The capital structure is 44.26% debt and 55.74% equity. This means that the firm is using mainly Equity to fund their operations. This is not ideal as it results in them having a higher tax liability as Lower tax shield is availed on the interest on debt taken, which could have resulted in lower WACC, since debt is cheaper.
Task 3 - NPV
    1. Calculation of NPV
    Calculation of Present Value of Cash Outflows
    Year    Cash Outflow    Discounting Factor @ 7%    Present Value
    0    $600,000.00    1    $600,000.00
    10    $200,000.00    0.51    $101,669.86
    20    $200,000.00    0.26    $51,683.80
    30    $1,000,000.00    0.13    $131,367.12
    Total            $884,720.78
    Calculation of Present Value of Cash Inflows
    Year    Particular    Amount
    1-30    Annual Savings    $50,000.00
    1-30    Tax Rate (From Task 2)    36%
    1-30    Additional Tax on Annual Saving    $18,000.00
    1-30    Annual Savings net of Tax    $32,000.00
    1-30    Add: Tax Sheild on Depreciation
    1-30    Tax Shield Depreciation on Initial $600k for 30 years    $7,200.00
    1-30    Tax Shield Depreciation on Subsequent $200k for 20 years    $3,600.00
        Tax Shield Depreciation on Subsequent $200k for 10 years    $7,200.00
    Thus, Annual Net Cash Inflows and Present Value of Cash Inflows would be as follows
    Year    Cash Inflows    Discounting Factor @ 7%    Present Value
    1    $39,200.00    0.9346    $36,635.51
    2    $39,200.00    0.8734    $34,238.80
    3    $39,200.00    0.8163    $31,998.88
    4    $39,200.00    0.7629    $29,905.49
    5    $39,200.00    0.7130    $27,949.06
    6    $39,200.00    0.6663    $26,120.62
    7    $39,200.00    0.6227    $24,411.79
    8    $39,200.00    0.5820    $22,814.76
    9    $39,200.00    0.5439    $21,322.20
    10    $39,200.00    0.5083    $19,927.29
    11    $42,800.00    0.4751    $20,333.97
    12    $42,800.00    0.4440    $19,003.71
    13    $42,800.00    0.4150    $17,760.48
    14    $42,800.00    0.3878    $16,598.58
    15    $42,800.00    0.3624    $15,512.69
    16    $42,800.00    0.3387    $14,497.84
    17    $42,800.00    0.3166    $13,549.38
    18    $42,800.00    0.2959    $12,662.98
    19    $42,800.00    0.2765    $11,834.56
    20    $42,800.00    0.2584    $11,060.33
    21    $50,000.00    0.2415    $12,075.65
    22    $50,000.00    0.2257    $11,285.66
    23    $50,000.00    0.2109    $10,547.34
    24    $50,000.00    0.1971    $9,857.33
    25    $50,000.00    0.1842    $9,212.46
    26    $50,000.00    0.1722    $8,609.77
    27    $50,000.00    0.1609    $8,046.52
    28    $50,000.00    0.1504    $7,520.11
    29    $50,000.00    0.1406    $7,028.14
    30    $50,000.00    0.1314    $6,568.36
    Present Value of Cash Inflows            $518,890.26
    Thus, NPV is             -$365,830.51
    Since, NPV is Negative, Project should not be accepted
Task 3 - MIRR
    Financing Rate    7%
    Investment Rate
    1 to 10 Years    6%
    10 to 20 years    7.66%
    21 to 30 years    7.74%
    Using Cash Flows from NPV
    Calculation of Present Value of Cash Outflows
    Year    Cash Outflow    Discounting Factor @ 7%    Present Value
    0    $600,000.00    1    $600,000.00
    10    $200,000.00    0.51    $101,669.86
    20    $200,000.00    0.26    $51,683.80
    30    $1,000,000.00    0.13    $131,367.12
    Present Value of Cash Outflows            $884,720.78
    Year    Cash Inflows    Using the Investment Rate
    1    $39,200.00    6.00%    $212,400.81
    2    $39,200.00    6.00%    $200,378.12
    3    $39,200.00    6.00%    $189,035.96
    4    $39,200.00    6.00%    $178,335.81
    5    $39,200.00    6.00%    $168,241.33
    6    $39,200.00    6.00%    $158,718.24
    7    $39,200.00    6.00%    $149,734.19
    8    $39,200.00    6.00%    $141,258.67
    9    $39,200.00    6.00%    $133,262.89
    10    $39,200.00    6.00%    $125,719.71
    11    $42,800.00    7.66%    $174,082.70
    12    $42,800.00    7.66%    $161,691.27
    13    $42,800.00    7.66%    $150,181.87
    14    $42,800.00    7.66%    $139,491.73
    15    $42,800.00    7.66%    $129,562.53
    16    $42,800.00    7.66%    $120,340.11
    17    $42,800.00    7.66%    $111,774.14
    18    $42,800.00    7.66%    $103,817.91
    19    $42,800.00    7.66%    $96,428.02
    20    $42,800.00    7.66%    $89,564.15
    21    $50,000.00    7.74%    $97,828.73
    22    $50,000.00    7.74%    $90,798.34
    23    $50,000.00    7.74%    $84,273.19
    24    $50,000.00    7.74%    $78,216.96
    25    $50,000.00    7.74%    $72,595.96
    26    $50,000.00    7.74%    $67,378.91
    27    $50,000.00    7.74%    $62,536.77
    28    $50,000.00    7.74%    $58,042.62
    29    $50,000.00    7.74%    $53,871.43
    30    $50,000.00    7.74%    $50,000.00
    Cash Flows Using Investment Rate            $3,649,563.06
    MIRR    (Cash Flows Using Investment Rate/Present Value of Cash Outflows)^(1/n) - 1
        4.84%
    Thus, MIRR is 4.84%

Task 4
This task is about analyzing a real option.
You will prepare a report for the CFO and management by answering the questions in this task.
The firm has to decide whether to invest $30 Million in a new enterprise system to help manage