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1) what are the annual projected cash flows between 2005-2009

EBIT x (1-Tax rate)


Current Income Statement
=+ Depreciation & Amortization
Current Income Statement
=- Changes in Working Capital
Prior & Current Balance Sheets: Current
CA cash excluded - CL current financial
=- Capital expenditure (CAPEX)
Prior & Current Balance Sheets: Propert
= Free Cash Flow
2005E
2006E
Sales
120
240
EBITD
18
36
Depreciation
20
23
EBIT
-2
15
Tax Expense
-1
5
EBIAT
-1
8
Capex
30
30
Investment in Working capital
0
0

FCF

-11.2

2)
what is the appropriate discount rate
(Ra = Rf +beta(Expected market return - Risk free rate))
Market Risk Premium = Expected Return of the Market Risk-Free Rate
b) what is the value of the project?
NPV of cashflows
NPV with growth 8%
NPV of project

0.158

$43.56
306.61323
$320.17

3)Value the project using the Adjusted Present Value (APV)


approach assuming the firm raises 75 million of debt to
fund the project and keeps the level of debt constant in
perpetuity.
APV=NPV+PV(Tax shield)
APV = 320,000000 + 30,000,000 =
4) Value the project using the Weighted Average Cost of Capital (WACC) approach assuming the
Re=Cost of Equity = Risk-Free Rate + Beta * (Market Rate of Return
- Risk-Free Rate)
Re = cost of equity
Rd = cost of debt
E = market value of the firms equity
D = market value of the firms debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate

* Re +

* Rd * (1 Tax ra

NPV =
$46.06
NPV with 8% 390.07388
NPV of proje $406.14

5)

How do the values from the APV, WACCF approaches compare? How
do the assumptions about financial policy differ across the three
approaches?
Provided I did the last calculation correc
the wacc approach has a lower cost but
the full equity approach is even lower in

e Statement
e Statement
t Balance Sheets: Current Assets and Liability accounts
ded - CL current financial debt excluded
t Balance Sheets: Property, Plant and Equipment accounts
2007E

2008E

Risk-free rate
Project cost of debt
Market risk premium
tax rate
As set beta for competi t

2009E

390
59
25
34
13
20
30
0

560
84
28
57
23
34
30
0

750
113
30
83
33
50
30
0

15.4

32.2

49.8

0.08

0.078

(Tax shield)

PV(Tax shield) = debt x tax rate = 75000000 x 40% =


30000000
00000 + 30,000,000 = 350,000,000
pproach assuming the firm maintains a constant 25% debt-to-market value ratio in perpetuity?

e+

* Rd * (1 Tax rate)

Re =
Wacc =
r-g =
g=

0.1796
0.1449
0.0649
0.08

Be_equity=

Be Equity = Be asset [1 + (1-tax) * D/E]


1.8

the last calculation correct there is more value with the WACC approach with a constant 25% debt to market ratio in pe
oach has a lower cost but subject to tax because of the debt
approach is even lower in cost.

0.05
0.068
0.072
0.4
1.5

638.46
2.0822976
306.61323
$350.17
$320.17

767.33436
1.9671514
390.07388
$436.14
$406.14

2004A
(in millions) Revenue
COGS and expenses EBITDA Depreciation
EBITDA
Depreciation
EBIT
Tax expense
Net income

30000
26600
3340
1460
1880
1000
880HKD

to market ratio in perpetuity.

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