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XYZ Ltd is planning to invest in a project which costs in Year 0 a capital investment of Rs 80 crores. It has made following projections. Its expected sales & EBITDA forecast is as follows:

Year Sales EBITDA %

1 Rs 10 cr 0%

2 Rs 20 cr 10%

3 Rs 50 cr 15%

4 Rs 100cr 20%

5 Rs 120cr 22%

6 Rs 150cr 22%

7 Rs 150cr 22%

Its annual depreciation is Rs 2 cr, Its annual interest costs are Rs 1 cr, tax rate is 34% , Working capital requirements are 15% of sales. Annual capital expenditure requirements after initial capital investment in Year 0 are Year 1 (Rs 5 cr), Year 2 (Rs 3 cr) and there after Rs 2 crores annually. In year 7 business will have a terminal value of Rs 200 crores i.e. in 7th year at the end of project, the project residual things ie assets and working capital etc can be sold for Rs 200 crores.

For XYZ Ltd cost of capital or hurdle rate assume Debt, Equity 1:1, pre tax cost of debt is 14%, cost of equity is 25%.

Find NPV, IRR and Payback period and give your conclusion if XYZ Ltd should do the project.

Note: Please show all the calculations & formulas in excel sheet.

Hint: Use excel to calculate XYZ Ltd WACC (weighted average cost of capital) and then prepare cash flows to find year wise final + - cash flows ie cash outflows or cash inflows and then find IRR and NPV at WACC PV Discounting Rate. When making cash flows remember to calculate Working Capital Requirements and only take increase/ decrease in Working Capital as you Cash Outlow/ Inflow etc. Terminal value is Cash Inflow in Year 7.

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Lelia Lubowitz
Lelia LubowitzLv2
28 Sep 2019

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Please do 2 & 3. I have the answer correct listed for 1 for reference, if needed.

Capital Structure Theory Problem 15-8 Capital Structure Analysis

The Rivoli Company has no debt outstanding, and its financial position is given by the following data:

Assets (Market value = book value) $3,000,000

EBIT $500,000

Cost of equity, rs 10%

Stock price, Po $15

Shares outstanding, no 200,000

Tax rate, T (federal-plus-state) 40%

The firm is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 13% to reflect the increased risk. Bonds can be sold at a cost, rd, of 8%. Rivoli is a no-growth firm. Hence, all its earnings are paid out as dividends. Earnings are expected to be constant over time.

What effect would this use of leverage have on the value of the firm?

1) What would be the price of Rivoli's stock? Round your answer to the nearest cent. CORRECT ANSWER= $14.11 PER SHARE

2) What happens to the firm's earnings per share after the recapitalization? Round your answer to the nearest cent. The firm INCREASED its EPS by $ ______. (?)

3) The $500,000 EBIT given previously is actually the expected value from the following probability distribution:

Probability EBIT
.10 $115,000
.20 $200,000
.40 $400,000
.20 $850,000
.10 $1,415,000

Determine the times-interest-earned ratio for each probability. Round your answers to two decimal places.

Probability TIE
.10 ?
.20 ?
.40 ?
.20 ?
.10 ?

What is the probability of not covering the interest payment at the 30 percent debt level? Round your answer to two decimal places. %.

1. Allison Engines Corporation has established a target capital structure of 40% debt and 60% common equity. The current market price of the firm's stock is P0 = $36; its last dividend was D0 = $2.80, and its expected dividend growth rate is 8%. Allison must issue new common stock at a flotation cost of 10%. Tax rate is 40%.

Find: 1. What is Allison's cost of new outside equity capital, i.e., cost of new equity?

2. Given a cost of new debt of 8%, find Allison's WACC.

hint: use constant growth formula to find Rs

2.

Clark Communications has a capital structure that consists of 70% common stock and 30% long-term debt. In order to calculate Clark's WACC, an analyst has accumulated the following information:

The company currently has a 30-year bond issue outstanding, 15-years old, 8% annual coupon bonds that have a face value of $1,000 and sell for $1,075.

The risk-free rate is 5%.

The market risk premium is 4%.

The beta on Clark's common stock is 1.1.

The company's retained earnings are sufficient so that they do not have to issue any new common stock to fund capital projects.

The company's tax rate is 38%.

Given this information, what is Clark's WACC? (hints: find bond's YTM; use CAPM for stock return)

Calculation of individual costs and WACC

Dillon Labs has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The weighted average cost is to be measured by using the following weights: 40% long-term debt, 10% preferred stock, and 50% common stock equity (retained earnings, new common stock, or both). The firm’s tax rate is 40%.

Debt The firm can sell for $980 a 10-year, $1,000-par-value bond paying annual interest at a 10% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of $20 per bond.

Preferred stock Eight percent (annual dividend) preferred stock having a par value of $100 can be sold for $65. An additional fee of $2 per share must be paid to the underwriters.

Common stock The firm’s common stock is currently selling for $50 per share. The dividend expected to be paid at the end of the coming year (2016) is $4. Its dividend payments, which have been approximately 60% of earnings per share in each of the past 5 years, were as shown in table 1. It is expected that to attract buyers, new common stock must be underpriced $5 per share, and the firm must also pay $3 per share in flotation costs. Dividend payments are expected to continue at 60% of earnings. (Assume that rr = rs.)

a.) Calculate the after-tax cost of debt.

b.) Calculate the cost of preferred stock.

c.) Calculate the cost of common stock.

d.) Calculate the WACC for Dillon Labs.

Please show all formulas and steps

Table 1
Year Dividend ($)
2015 3.75
2014 3.50
2013 3.30
2012 3.15
2011 2.85

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