See attached
>Instructions 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 Aftertax Cash Flowreevaluation 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% annuallyCost of Capital
Find the cost of Equity using the Capital Asset Pricing Model (CAPM)
2
12
E
D
End
Re
. Find the cost of equity using CAPM.
WACC
. Find the weighted average cost of capital.
Instructions:  
1  
Find the Weighted Average Cost of Equity (WACC)  
RF  ꞵ  RM  = CAPM  
————————————–  
Total Capital (V)  $ –  0  
Last Fiscal  Year  Interest Expense  
Tax Rate (TC)  
1. Find the weight of equity = E / (E + D).  
2. Find the weight of debt = D / (E + D).  
3  
Rd  4. Find the cost of debt.  
5 
WACC Information from Largo Global
a. As of today, Largo Global market capitalization (E) is $
,3
73,341,000.1
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 longterm debt (i.e., bond) as the debt and use the bond valuation formula when calculating the cost of debt and WACC.
Payback
.0%
million
Interest Expense
1
PV
NPV
IRR
NPV
1 2 3 4
$900.0
$1,300.0
$1,300.0
PV
NPV
IRR
0
1
2
3
4
5
6
7
8








Cash Flow
($191.10)
$271.17
3
6
0
1
2
3
4
5
6
7
8
PV









$0.00
$0.00
$0.00
Payback Period
years
months
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  
Discount rate for the project using WACC  
Loan Amount  
Loan Interest rate (Prime + 2)  5.25%  
Table 2 – Aftertax Cash Flow Table  
(all figures in $ millions)  
Projected Cash Inflows from Operations  Projected Cash Outflows from Operations  Depreciation Expense  Projected Taxable Income  Projected Federal Income Taxes  Projected State Income Taxes  Projected Aftertax Cash Flows  PV  NPV  IRR  NPV2  
Excel function to use :  SLN  IPMT  
$850.0  $840.0  $23.89  $0.00  ($13.89)  ($3.61)  ($1.11)  $14.72  
$900.0  $810.0  
$990.0  $870.0  
$1,005.0  
$1,200.0  $1,100.0  
$1,300.0  $1,150.0  
$1,350.0  
$1,320.0  
NPV1 – calculated NPV including interest expense  
NPV2 – calculated NPV at the lower discount rate of 5.02%  
Payback Timeline View Example of Actual Cash Flows  
  
($191.10)  $8.76  $62.18  $82.63  $73.42  $70.84  $104.60  $39.40  $20.44  $271.17  
Cummulative Cash Flow  
($182.34)  ($120.16)  ($37.53)  $35.89  $106.73  $211.33  $250.73  
Payback Period  years  months  
Discounted Cash Flow (DCF)  
Cummulative DCF  
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? 
AfterTax Cash Flow Reevlauation and Payback Timelines Instructions
Technologically advanced distribution equipment proposal reevaluation
The CFO has asked you to reevaluate 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 Aftertax 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 Aftertax 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?
Budget Projections
Complete the budget projections for years
–
using the following information
Expense increases 2¾% annually
s assume the Acutal
figure as the base for the budget and and forecast then add the amount calculated in the Payback tab for both budget and forecast.
1). 2020
2021
2024
0
0
0
0
0
0
0
0
0
0
0
0
Interest expense
0
0
0
0
0
0
0
0
INSTRUCTIONS:  
1).  2021  2024  
Revenue increases 4% annually  
For Depreciation and  Interest expense  2020  
2). Answer the question below the forecast.  
Largo Global Income Statement of December 31, 2020 (millions)  
ACTUAL  BUDGET  FORECAST  
2022  2023  
Sales (net sales)  $2,013  
Cost of goods sold  1400  
Gross profit  613  
Selling, general, and administrative expenses  125  
Earnings before Interest, taxes, depreciation, and amortization (EBITDA)  488  
Depreciation and amortization  174  
Earning before interest and taxes (EBIT) Operating income (loss)  314  
141  
Earnings before taxes (EBT)  173  
Taxes (34%)  59  
Net earnings (loss)/Net Income  $ 114  
2). Based on the changes suggested throughout the 5 projects, is Largo Global in a better financial position? 