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FIN - Project Payouts Assignment

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Question;A project has a 4 year lifespan. The project requires a capital expenditure of $100 in year 1. The expenditure has an accounting life of 2 years and will be depreciated on a straight-line basis during years 1 and 2. The project will be partially financed with a $90 interest-only bond floated at the beginning of year 1 such that the first interest payment will occur at the end of year 1. The bond has a 10% interest rate. The project will generate revenues of $100/year with cost of goods sold of $10 and SG&A expenses of $10. The tax rate is 35%.1. What is the project?s net income in each year? (record your answers in the table below)2. What are the project cash flow after-tax? (record your answers in the table below)3. What are the levered equity cashflows? (record your answers in the table below)Year 1 2 3 4Net Income Project Cashflow after-tax Levered Equity Cashflow 4. What is the project NPV at a discount rate of 12%?A firm will be worth either $200 (Scenario 1, probability = 0.2), $300 (Scenario 2,probability = 0.5), or $600 (Scenario 3, probability = 0.3). The firm has a senior bond outstanding with face value $150 and a promised rate of 4%, and a junior convertible bond with face value $75, a promised rate of 9%, and if converted will have claim to 20% of the equity value. The remaining value is equity which is valued according to the CAPM with a Beta of 1.5 (expected equity premium is 8% and riskfree rate is 4%).5. Create a payoff table showing the ending values in each scenario, the expected ending values and the present values of each investment (senior bond, junior bond, equity), as well as the firm.Firm Senior bond Convertible Bond EquityScenario 1 $200 Scenario 2 $300 Scenario 3 $600 Expected Ending value Present value Expected return6. What is the firm?s cost of equity? Hint- Cost of capital can be measured by expected return.7. What is the firm?s equity weight?8. What is the firm?s cost of the junior bonds?9. What is the firm?s weight of the junior bonds?10. What is the firm?s cost of the senior bonds?11. What is the firm?s weight of the senior bonds?12. What is the firm?s weighted average cost of capital?The firm from questions 5 through 12 above has identified a new project that would cost $60 today, and generate either $30, $35, or $150 in Scenario 1, Scenario 2, and Scenario 3, respectively.13. What is the project?s NPV? Hint- use the weighted average cost of capital calculated above as a discount rate.14. Create a payoff table showing the ending values in each scenario, the expected ending values and the present values of each investment (senior bond, convertible bond, equity) if the project were financed by issuing additional senior bonds with face value $62.40. Assume the beta of the equity would increase to 1.625, causing the expected equity return to change. As long as the senior bonds are riskless, the expected return should remain at 4%. Hint- the additional senior bonds would have a value of $62.40 at maturity, and would sell for a discount today. Hint- The cost of the firm?s capital should not have changed (this value could be used to discount the expected ending firm value).Firm Senior bond Convertible Bond EquityScenario 1 $230 $212.40Scenario 2 $335 $212.40Scenario 3 $750 $212.40Expected Ending value Present value Expected return15. Calculate the firm?s weighted average cost of capital with the new project.16. Consider the present values of each investment with the project (from Question 14) and without (from Question 5). Identify any investments that benefit from the new project, and any investment that are damaged by the new investment

 

Paper#49715 | Written in 18-Jul-2015

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