Case 18
Year 0 2007 Investment Capital outley Δ Net Working Capital Cash outley NWC Investment Recovery Equipment Salvage NWC (full recovery) Sales Cost of Goods Sold (-) SG&A Expense (-) Opperating Savings (+) Depreciation (-) Operating Profit before tax (16,000,000)
Year 1 2008 (2,000,000) 400,000 (400,000)
Year 2 2009
Year 3 2010
1,000,000 (600,000)
1,000,000
4,000,000 3,000,000 200,000 2,000,000 3,000,000 (200,000)
10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
Tax Expense (-) NOPAT Depreciation (+) NWC Investment Free cash flows 11% $820,733.69
(80,000) (120,000) 3,000,000 (400,000) (2,000,000) 480,000
1,000,000 1,500,000 3,000,000 (600,000) 3,900,000
1,000,000 1,500,000 3,000,000
(16,000,000) (16,000,000)
4500000
Should use WACC Cost of Capital
As we've previously discussed in class, WACC is typically the best number to use for cost of ca WACC=KdWd(1-T)+KeWe Ke=rF+B(MRP)
Market Value Of Equity=#of shares outstanding (market share price)
MV of Equity rF MRP 4.60% 6%
$
12,000
B # of shares MP of shares Total Debt
1.1 500 $24 3000
Tax
40%
Kd= WACC=KdWd(1-T)+KeWe WACC 9.6656%
Year 4 2011
Year 5 2012
Year 6 2013
1,000,000
1,000,000
1,000,000
1080000 1000000 10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
1,000,000 1,500,000 3,000,000
1,000,000 1,500,000 3,000,000
1,000,000 1,500,000 3,000,000
4,500,000
4,500,000
6,580,000
st number to use for cost of capital
g (market share price)
BV of Debt Wd=D/D+E We=E/D+E
$
3,000 Debt+Equity 20% 80%
$
15,000
Ke Kd
11.200% Current Debt/Total (1 year bank rate) + Long term debt/total debt (A rated bond rate) Bank Rate + 1% 5.38%+1% Current Debt 500 Bank Rate 5.38% 6.38% Long Term 2500 A rated
Year 1 2008 (2,000,000) 400,000 (400,000)
Year 2 2009
Year 3 2010
1,000,000 (600,000)
1,000,000
4,000,000 3,000,000 200,000 2,000,000 3,000,000 (200,000)
10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
Tax Expense (-) NOPAT Depreciation (+) NWC Investment Free cash flows 11% $820,733.69
(80,000) (120,000) 3,000,000 (400,000) (2,000,000) 480,000
1,000,000 1,500,000 3,000,000 (600,000) 3,900,000
1,000,000 1,500,000 3,000,000
(16,000,000) (16,000,000)
4500000
Should use WACC Cost of Capital
As we've previously discussed in class, WACC is typically the best number to use for cost of ca WACC=KdWd(1-T)+KeWe Ke=rF+B(MRP)
Market Value Of Equity=#of shares outstanding (market share price)
MV of Equity rF MRP 4.60% 6%
$
12,000
B # of shares MP of shares Total Debt
1.1 500 $24 3000
Tax
40%
Kd= WACC=KdWd(1-T)+KeWe WACC 9.6656%
Year 4 2011
Year 5 2012
Year 6 2013
1,000,000
1,000,000
1,000,000
1080000 1000000 10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000
1,000,000 1,500,000 3,000,000
1,000,000 1,500,000 3,000,000
1,000,000 1,500,000 3,000,000
4,500,000
4,500,000
6,580,000
st number to use for cost of capital
g (market share price)
BV of Debt Wd=D/D+E We=E/D+E
$
3,000 Debt+Equity 20% 80%
$
15,000
Ke Kd
11.200% Current Debt/Total (1 year bank rate) + Long term debt/total debt (A rated bond rate) Bank Rate + 1% 5.38%+1% Current Debt 500 Bank Rate 5.38% 6.38% Long Term 2500 A rated