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##### Capital Budgeting

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**Question**

Capital Budgeting, Word file and excel file attached, some one needs to answer all the questions base on the data on the excel file.;Capital Budgeting ? Fall 2014 Exam 2;Part A;A-Co has assets of $830.5 million and liabilities and equities as shown in Exhibit A.;The current stock price of A-Co is $22.50 and there are 40 million shares outstanding. Interest rates for debt with similar risk to A-Co are 8%. The company has a 40% tax rate. The current risk free rate is 2%.;1) What is the weight of debt in the capital structure?;2) What is the weight of equity in the capital structure?;3) Based on a report from Ibbotson?s the unlevered Beta for A-Co is 0.90. What is the levered Beta for A-Co given the current capital structure?;4) What is the cost of equity for A-Co?;5) What is the after tax cost of debt for A-Co?;6) What is the weighted average cost of capital for A-Co?;Part B;The 10 year cash flow projections in Exhibit B are for a proposed gas purchase project and are based on the following assumptions;? The investment includes $1.2 million to lay a natural gas pipeline. The pipeline is expected to last 10 years and be depreciated using 7 year MACRS.;? The investment will require a $145,000 increase in net working capital that will be recovered fully at the end of the project.;? The well is expected to produce 900 mcf per day of natual gas in year 1.;? Production will decline over the remaining nine year period at a rate of 20% per year. (this is true for all scenarios);? A fee consisting of 50% of the wellhead natural gas price must be paid to the producer. (For example, if the wellhead natural gas price is $6.00 per mcf, $3.00 per mcf must be paid to the producer.);? Gas processing and compression costs of $0.65 per mcf will also be incurred.;? There is no salvage value for any of the equipment.;? The natural gas price at the wellhead is currently $6.00 per mcf.;? The cost of capital is 15%. The income tax rate is 40%.;7) What is the NPV of the project as proposed?;8) Based on the NPV analysis should the project be approved?;9) Perform a sensitivity analysis on the project. What is the NPV at a natural gas price of $8.00 per mcf and year 1 production of 1200 mcf per?;10) What is the NPV at a worst case natural gas price of $3.00 per mcf and year 1 production of 700 mcf?;11) What is the breakeven natural gas price?;12) What is the breakeven starting natural gas volume?;13) What is the breakeven initial investment (pipeline + working capital)?;14) Given the results of your risk analysis, would you recommend this project? Why or why not?;Part C;The balance sheet and income statement or CeeCo are in Exhibit C. Prepare a common size balance sheet and income statement for CeeCo. Include the common size statements in your spreadsheet file.;16) How much cash does CeeCo have on hand relative to total assets?;17) What proportion of CeeCo?s assets has the firm financed using short term debt?;18) What percent of CeeCo?s revenues does the firm have left over after paying all of its expenses including taxes?;19) What is the relative importance of Ceeco?s major expense categories?;Prepare a 2012 pro forma income statement, balance sheet, and free cash flow for CeeCo using the following assumptions;? Revenue will grow 20%.;? COGS will increase by one percentage point. All other expenses will remain at the current percentage levels except interest expense which will remain at its current dollar level.;? Cash will remain at $500. The remaining working capital accounts will increase in proportion to the revenue growth.;? Net plant, property and equipment will increase in proportion to the increase in revenue.;? No cash dividends are paid. Any financing will be done via short term debt.;20) What is the net income for 2012?;21) What is the FCF for 2012?;22) What is the year end value of all assets?;23) How much additional short term debt was added in 2012?;24) What is the sustainable growth rate for CeeCo for 2012 (using 2011 net income) based on working capital only?;25) What is the sustainable growth rate for CeeCo for 2012 (using 2011 retained earnings) based on all assets?

Paper#23765 | Written in 18-Jul-2015

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