See attached
>Instructions
Complete the tab quity using the Capital Asset Pricing Model (CAPM)
)
Complete the tab re-evaluation table
CF Payback timeline
Complete the tab venue increases % annually
Cost of Capital Find the cost of Equity using the Capital Asset Pricing Model (CAPM) 2 E D End Re . Find the cost of equity using CAPM.
WACC . Find the weighted average cost of capital.
WACC Information from Largo Global ,3 3,341,000.1 Payback .0%
million Interest Expense 1
PV $900.0 $1,300.0 $1,300.0 PV NPV IRR 0 | Cash Flow ($191.10) $271.17 3 6 0 | $0.00 $0.00 Payback Period years months After-Tax Cash Flow Re-evlauation and Payback Timelines Instructions 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.
2020 2024 0 0 0 Interest expense 0 0
2
INSTRUCTIONS
Cost of Capital
o
Find the cost of
E
o Find the Weighted Average Cost of Capital (
WACC
Payback
o Complete the After-tax
Cash Flow
o Complete the
D
o Complete the questions on the tab
Budget Projections
o
Re
4
o
Expense increases 2¾% annually
Instructions:
1
Find the Weighted Average Cost of Equity (WACC)
1
RF
ꞵ
RM
= CAPM
————————————–
2
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
a. As of today, Largo Global market capitalization (E) is $
6
7
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
Discount rate for the project using WACC
Loan Amount
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
Projected Taxable Income
Projected Federal Income Taxes
Projected State Income Taxes
Projected After-tax Cash Flows
PV
NPV
IRR
NPV2
Excel function to use :
SLN
IPMT
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
5
$1,200.0
$1,100.0
6
$1,300.0
$1,150.0
7
$1,350.0
8
$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
1
2
3
4
5
6
7
8
|
|
|
|
|
|
|
|
($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
1
2
3
4
5
6
7
8
PV
|
|
|
|
|
|
|
|
$0.00
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?
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?
INSTRUCTIONS:
1).
2021
2024
Revenue increases 4% annually
For Depreciation and
Interest expense
2020
2). Answer the question below the forecast.
1).
Largo Global Income Statement of December 31, 2020 (millions)
ACTUAL
BUDGET
FORECAST
2021 2022
2023
Sales (net sales)
$2,013
Cost of goods sold
1400
Gross profit
613
0
0
0
Selling, general, and administrative expenses
125
Earnings before Interest, taxes, depreciation, and amortization (EBITDA)
488
0
0
0
Depreciation and amortization
174
Earning before interest and taxes (EBIT) Operating income (loss)
314
0
0
0
141
Earnings before taxes (EBT)
173
0
0
0
Taxes (34%)
59
Net earnings (loss)/Net Income
$ 114
0
0
0
2). Based on the changes suggested throughout the 5 projects, is Largo Global in a better financial position?
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