Task 1
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%
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 8
In case the Market price of share is 325 per share In case the Market price of share is 35.75 per share Seller - In case the Market price of share is 35 per share
Available Capital XXXXXXXXXX Available Capital XXXXXXXXXX Available Capital XXXXXXXXXX
Amount per share 325 Amount per share 35.75 Amount per share 35
No. of shares Repurchased 230769 No. of shares Repurchased XXXXXXXXXX No. of shares Repurchased XXXXXXXXXX
No. of Shares Repurchased
[VALUE]
XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX