Continue with possible probs related to Capital Structure

Wrap up topics not yet discussed

MONDAY - up to Dividends na
TODAY - Probs related to materials discussed

Plotting
NPV Profile Graphical representation of projects NPV
Ver Value of NPV
Hor Interest Rates
*Two Projects lang
*Look at range of possible NPVs

FOOD A B
0 - 350,000.00 - 350,000.00 -
1 425,000.00 16,000.00 - 409,000.00
2 16,000.00 16,000.00
3 466,000.00 466,000.00
IRR 8.7149193% -CROSS OVER RATE

COMPUTE NPV OF BOTH PROJECTS ASSUMING DISCOUNT RATES

NPV IRR
Rates A B A B
0% 75,000.00 148,000.00 21.42857143% 12.96090837%
5% 54,761.90 82,298.89
7% 47,196.26 59,323.10
10% 36,363.64 27,881.29
20% 4,166.67 - 55,879.63
25% - 10,000.00 - 88,368.00

At certain rates, A will be superior to B

*Rates 7% below, B will be superior to A
*Rates 7% above, A will be superior to B
NPV PROFILE - determine the cross-over point or rate
CROSS OVER RATE - rate used that will generate the same NPV for both projects
*Deduct from CFs of B the CFs of A, then get IRR of Difference. Same result if A minus B.
 IRR NPV
Blue 0.18 11,355.00
Red 0.19 10,722.00

WACC of 10%
Project Blue
Mas superior ang NPV

Market Values MARKET VALUES WEIGHTS

Bonds Outstanding 10,000,000.00 0.20
Preferred Stock 2,000,000.00 0.04
Common Stock 38,000,000.00 0.76
TOTAL CAPITAL 50,000,000.00 1.00

MARKET VALUES WEIGHTS TARGET CAP STRUCTURE

Debt 25,000,000.00 0.42 0.38
Equity 35,000,000.00 0.58 0.63
60,000,000.00
d/e ratio of .6

OPTIMAL CAPITAL BUDGET - point where two lines (stated below) cross
-maximized ang returns
-projects prior OCB Point, reinvest: projects beyond OCB Point, loss
*Investment Opportunity Schedule
*Marginal Cost of Capital

RE-DO THIS
Semi-annual bond 2.00
N 10.00 20.00
Par 1,000.00
Coupon Rate 6% 0.03 30.00
PV 1,010.30
Tax Rate 40%

Before Tax COD 5.8624148071%

After Tax COD 3.5174488842%
Dividend 8% 12.00
Par Value 150.00
Market Value(Po) 100.00

Cost of Preferred 12%

Rfr 6%
Risk Premium 10%
Beta 1.30

WACC 0.19

Retention Rate 60%

ROE 20%
D1 2.00
Po 40.00
G 0.12

COE 0.17

YTM on LTD 9%
RP 6%

BYPRP 15%

CS Po 50.00
Beta 1.75
Rfr 3%
Market Return 7%
Tax Rate 35%

COE 0.10
YTM - M, 10yr 10%
YTM - US, 10yr 4.20%
SD 29%
SD-US 20%
Project's Beta 1.10
Expected Return - Malaysi 9%
Rfr 5% MRP 4%
0.03
COUNTRY RISK PREMIUM 8.41% 12.41%
COST OF EQUITY 18.651%

bREAKPOINT - point where there is a change in capital

*Marginal cost of capital - step ladder
=Amount of Capital at which a component's cost of capital changes over

Target Capital Structure Equity 70%

Debt 30%

Amount of Capital that will trigger breakpoint - 150/.3

*Breakpoint - will need to raise 500 million, and
*Breakpoint equity - 300/.7
When debt exceeds 150million, initial capital 500million

Floatation Cost - Cost related to issuing new debt or new equity

*Adjust CFs in valuation by adding the estimated

0.00 1.00 2.00 3.00

CFs - 75,000.00
Equity - 52,500.00 - 54,600.00
Debt - 22,500.00

Adjusted Cfs - 77,100.00 20,000.00 20,000.00 20,000.00

Before Tax COD 5%

Tax Rate 30%
D1 1.00 per share
Po 25.00 per share
Expected growth rate 4% Debt
Target Capital Structure Equity 70% Equity
Debt 30% WACC
Floation Cost for Equity 4%
NPV 5,678.20216828544

DOL Blue
DFL Blue
BLUE RED
# of Units Produced and Sold 200,000.00
SPU 20.00
VCU 7.00
Fixed Op Cost 1,000,000.00
Fixed Financing Exp

Higher earning volatility - blue is steeper

Business Risk
1. Sales - related to total revenue, the uncertainty associated with total revenue,
EX: Blue and Green, higher std dev of price and units sold, wider distribution of operating profit
Riskier ang mas malapad kesa sa matangkad
2. Operating - related to cost structure, fixed and variable
DOL

*DOL is negative if Op Income is negative

*Break-even, pinakasensitive ang galaw
*DOL is undefined if operating income is 0

Financial Risk

Expected Op Earnings 1,000,000.00

Int Rate on Debt 6%
Income Tax Rate 35%

A
Total Assets 5,000,000.00
No Debt
50% Current -50%
Op Income 1,500,000.00 1,000,000.00 500,000.00
Interest 6% -
Taxes 35% - 525,000.00 350,000.00 - 175,000.00
NET INCOME 975,000.00 1,350,000.00 325,000.00

ROE 0.20 0.27 0.07

B
Total Assets 5,000,000.00
Debt 2,500,000.00
Equity 2,500,000.00
50% Current -50%
Op Income 1,500,000.00 1,000,000.00 500,000.00
Interest 6% - 150,000.00 - 150,000.00 - 150,000.00
1,350,000.00 850,000.00 350,000.00
Taxes 35% - 472,500.00 - 297,500.00 - 122,500.00
NET INCOME 877,500.00 552,500.00 227,500.00

ROE 0.35 0.22 0.09

# of Sold 1,000.00
SPU ₱ 20.00 20,000.00 SALES
VCU ₱ 15.00 - 15,000.00 VC
CM ₱ 5.00 5,000.00 GP
DOL 1.25 -GP/EBIT FC
DFL 2.00 -EBIT/EBT EBIT
Interest
EBIT 4,000.00 EBT

Break-even (Total) 600.00

# of Sold 1,000.00
SPU ₱ 20.00 20,000.00 SALES
VCU ₱ 15.00 - 15,000.00 VC
CM ₱ 5.00 5,000.00 GP
DOL 1.25 -GP/EBIT FC
DFL 2.00 -EBIT/EBT EBIT

EBIT 4,000.00

Break-even (Operating) 200.00

GET CAP STRUCTURE
 4.00 5.00

20,000.00 20,000.00

0.04 30%
0.08 70%
6.65%
distribution of operating profit
 DOL
20,000.00
- 15,000.00
5,000.00
- 1,000.00
4,000.00
- 2,000.00
2,000.00

DOL
20,000.00
- 15,000.00
5,000.00
- 1,000.00
4,000.00