Posted: March 10th, 2023

INSTRUCTIONS | |

Complete the Cost of Capital tab | |

o Find the cost of Equity using the Capital Asset Pricing Model (CAPM) | |

o Find the Weighted Average Cost of Capital (WACC) | |

Complete the Payback tab | |

o Complete the After-tax Cash Flow re-evaluation table | |

o Complete the DCF Payback timeline | |

o Complete the questions on the tab | |

Complete the Budget Projections tab | |

o Revenue increases 4% annually | |

o Expense increases 2¾% annually |

Instructions: | |||||||||||

1 | Find the cost of Equity using the Capital Asset Pricing Model (CAPM) | ||||||||||

2 | Find the Weighted Average Cost of Equity (WACC) | ||||||||||

1 | |||||||||||

RF | ꞵ | RM | = CAPM | ||||||||

————————————– | |||||||||||

2 | |||||||||||

E | |||||||||||

D | |||||||||||

Total Capital (V) | $ – 0 | ||||||||||

Last Fiscal Year End Interest Expense | |||||||||||

Tax Rate (TC) | |||||||||||

1. Find the weight of equity = E / (E + D). | |||||||||||

2. Find the weight of debt = D / (E + D). | |||||||||||

Re | 3. Find the cost of equity using CAPM. | ||||||||||

Rd | 4. Find the cost of debt. | ||||||||||

WACC | 5. Find the weighted average cost of capital. |

WACC Information from Largo Global a. As of today, Largo Global market capitalization (E) is $6,373,341,000.1 b. Largo Global’s Market value of debt is $761,000,000. c. Cost of Equity = CAPM from question 1 d. Cost of Debt = Last Fiscal Year End Interest Expense2 / Market Value of Debt (D). e. Use the tax rates given in Project 4 Tab 3. _________ 1 Market value of equity (E), also known as market cap, is calculated using the following equation: Market Cap = Share Price x Shares Outstanding from Project 1 2 From Project 1. Note that the Cost of Debt formula expressed at here is different from the cost of debt formula introduced in most textbooks. Most textbooks only consider the long-term debt (i.e., bond) as the debt and use the bond valuation formula when calculating the cost of debt and WACC.

Payback Table View | ||||||||||||

Table 1 – Data | ||||||||||||

Cost of new equipment (at year 0) | 191.10 | million | ||||||||||

Corporate income tax rate – Federal | 26.0% | |||||||||||

Corporate income tax rate – State of Maryland | 8.0% | |||||||||||

Discount rate for the project using WACC | ||||||||||||

Loan Amount | million | |||||||||||

Loan Interest rate (Prime + 2) | 5.25% | |||||||||||

Table 2 – After-tax Cash Flow Table | ||||||||||||

(all figures in $ millions) | ||||||||||||

Year | Projected Cash Inflows from Operations | Projected Cash Outflows from Operations | Depreciation Expense | Interest Expense | Projected Taxable Income | Projected Federal Income Taxes | Projected State Income Taxes | Projected After-tax Cash Flows | PV | NPV1 | IRR | NPV2 |

Excel function to use : | SLN | IPMT | PV | NPV | IRR | NPV | ||||||

0 | ||||||||||||

1 | $850.0 | $840.0 | $23.89 | $0.00 | ($13.89) | ($3.61) | ($1.11) | $14.72 | ||||

2 | $900.0 | $810.0 | ||||||||||

3 | $990.0 | $870.0 | ||||||||||

4 | $1,005.0 | $900.0 | ||||||||||

5 | $1,200.0 | $1,100.0 | ||||||||||

6 | $1,300.0 | $1,150.0 | ||||||||||

7 | $1,350.0 | $1,300.0 | ||||||||||

8 | $1,320.0 | $1,300.0 | ||||||||||

PV | ||||||||||||

NPV1 – calculated NPV including interest expense | NPV | |||||||||||

NPV2 – calculated NPV at the lower discount rate of 5.02% | IRR | |||||||||||

Payback Timeline View Example of Actual Cash Flows | ||||||||||||

0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | ||||

| | | | | | | | | | | | | | | | | | ||||

Cash Flow | ($191.10) | $8.76 | $62.18 | $82.63 | $73.42 | $70.84 | $104.60 | $39.40 | $20.44 | $271.17 | ||

Cummulative Cash Flow | ||||||||||||

($191.10) | ($182.34) | ($120.16) | ($37.53) | $35.89 | $106.73 | $211.33 | $250.73 | $271.17 | ||||

Payback Period | 3 | years | 6 | months | ||||||||

0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | PV | |||

| | | | | | | | | | | | | | | | | | $0.00 | |||

Discounted Cash Flow (DCF) | $0.00 | |||||||||||

$0.00 | ||||||||||||

Cummulative DCF | ||||||||||||

Payback Period | years | months | ||||||||||

ANSWER THESE QUESTIONS: | ||||||||||||

1. What is the total depreciation for tax purposes? | ||||||||||||

2. What is the total PV of the Cash Flows using the WACC rate? | ||||||||||||

3. What is the NPV using the WACC rate? | ||||||||||||

4. What is the NPV using the alternative rate? | ||||||||||||

5. What is the IRR? | ||||||||||||

6. What is the payback period using the DCF? | ||||||||||||

7. Should the project be accepted? Why? |

After-Tax Cash Flow Re-evlauation and Payback Timelines Instructions Technologically advanced distribution equipment proposal re-evaluation The CFO has asked you to re-evaluate the cash flow projections associated with the equipment purchase proposal due to the proposed loan agreement, and recommend whether the purchase should go forward. Table 1 shows the data and Table 2 shows projections of the cash inflows and outflows that would occur during the first eight years using the new equipment. Keep the following in mind: Row 34 has a suggested Excel function to use. Complete all the blank cells within the tables. I. In the Data Table: A. Use the WACC calulated on the Cost of Capital tab B. Calulate the loan amount with a 10% down payment II. In the After-tax Cash Flow: C. Complete the Depreciation Expense from Project 4 (straight line, $0 Salvage) D. Complete the interest expense using the loan interest rate. E. Complete the After-tax Cash Flow Table including the interest expense F. Compute the PV, NPV1, IRR, and adjusted NPV2 III. In the Payback Timeline View: G. Complete the discounted cash flow Payback Timeline View of Discounted Cash Flows i) complete the timeline amounts based on the DCF (DCF is the same as PV) ii) complete the timeline amountss for the Cummulative DCF iii) calulate the payback period in years and months IV. Answer the following questions: 1. What is the total depreciation for tax purposes? 2. What is the total PV of the Cash Flows using the WACC rate? 3. What is the NPV using the WACC rate? 4. What is the NPV using the alternative rate? 5. What is the IRR? 6. What is the payback period using the DCF? 7. Should the project be accepted? Why?

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