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Popa Energy Inc. is keen todevelop a power facility in the outskirts of Bagan, Myanmar. The financemanager has estimated that the lease of land for 20 years will require a yearlylease payment of...

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Popa Energy Inc. is keen to
develop a power facility in the outskirts of Bagan, Myanmar. The finance
manager has estimated that the lease of land for 20 years will require a yearly
lease payment of Myanmar kyat (MMK) 180 million. The facility’s plant, property
and equipment (PPE) will cost MMK 5 billion. The tax authorities allow straight
line depreciation of all PPE for this project.
At the end of the project, all PPE are to be transferred to the Bagan
council for nil reward.



The revenue for the project is
expected to be MMK 1 billion per year with operating cost (excluding lease
payments) of MMK 200 million per annum. The building law requires the facility to
be refurbished after 10 years of operation, at a one-time cost of MMK 600 million.



Energy production is one of
the targeted industries for the country’s growth. Hence, the Burmese government
has granted a concessionary tax rate of 10 percent (minimum) for the duration
of this project. The actual rate will be made known after project commencement.



The following information relates to the company at the
current time:



Number of ordinary shares : 400
million



Market price of ordinary shares : MMK 225 per
share





Book value of 7% debentures (Par MMK100) : MMK 2,900 million



(Redemption: 5 years. Semi-annual coupon)



Market value of debenture : MMK
108.00 per debenture



Equity beta :
1.2



Risk-free rate of return : 0.7%



Return on the market portfolio : 7.0%





The company uses
the current weighted cost of capital as the project’s cost of capital.



Required:



(a)
Compute
the cost of equity, after-tax cost of debt (using a financial calculator) and
the after-tax weighted average cost of capital. Assume the tax rate of 10
percent.





(b) Compute the project’s Net Present Value
and explain if the project should proceed.
Assume the tax rate of 10 percent.



(c) How much would the additional taxes be (in today’s dollars) for the
project decision in part (a) above to be reversed?



Note: To show all workings with accompanying
explanations.



Word count requirement: 1,000 with a tolerance of +10%. (actual
wordcount to be stated on the cover page of the assignment). Minimum number of
references: NIL.

q-oodtm2l5-iu42zxmt.docx
Answered 31 days After Oct 26, 2022

Solution

Prince answered on Nov 26 2022
36 Votes
NPV of Popa Energy Inc’s Proposal
Student Name
26th Nov 2022
(Word Count 944)
Question a)
The cost of equity is the return an investor expects to receive on a business venture. This price shows the amount that investors are willing to pay in the market in exchange for assuming ownership risk by acquiring firm shares. Investors use the cost of equity to make sure they are appropriately compensated for the financial risk they assume.
The dividend valuation model as well as the capital asset pricing model (CAPM) are the usual methods for calculating the cost of equity. The following equation is used by  (CAPM) to calculate cost of equity:
Cost of equity is determined by multiplying the investment's beta by the difference of the expected market return and the risk-free return.
The beta in the equation represents the average amount by which a stock's price changes in response to changes in the value of the entire stock market. You can perform your own beta calculations or use one of the many internet resources that provide a list of companies' betas throughout different time periods and in comparison to different market benchmarks. The total stock market's anticipated return is known as the expected market rate of returns. The risk-free rate of return, which is typically estimated as the yield on 3 US Treasury bills, is the lowest return rate that investors would willing to take in exchange for not accepting any financial risk.
In case of Popa Energy Inc, Cost of Equity is:
Cost of Equity = 0.7% + 1.2*(7% - 0.7%) = 0.7% * 7.56% = 8.26%.
The interest paid on the loan less the income taxes saved by writing off the interest charge on the business's income tax return is the after-tax cost of debt. Formula is Interest cost * (1 – Tax Rate)
In case of Popa Energy Inc,...
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