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12/01/2013

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Corporate Finance

Question No: 1
APV = NPV + NVP OF FINANCING
At year 1:
NPV= -50+40/ (1+.12)
1
= -14.2857NPV of financing = 50-(20+16)/ (1.08)
1
=30APV effect at year 1= -14.2857 + 30= 15.7143
At year 2:
NPV= -50+40/ (1+.12)
1
+20/ (1+.12)
2
=1.658NPV of financing =50 - 21.6/ (1+.08)
1
-15.96/ (1+.08)
2
=16.3169APV= 1.658 + 16.3169=17.9749
At year 3:
NPV= -50+40/ (1+.12)
1
+20/ (1+.12)
2
-25/ (1+.12)
3
=19.4527NPV of financing= 50-21.6/ (1+.08)
1
-15.96/ (1+.08)
2
-15.48/ (1+.08)
3
=4.0283APV=19.4527 + 4.0283=23.4810

Question No: 2
At year 0
Cost of equity =12%Cost of debt= 8% Tax rate=40%I-

Equity=0 debt=100%= (0*.12) + (1*.08*.6)=.048 =4.8%
At year 1
II-

Equity= 40% debt=60%= (20/50) * .12 + (30/50)*.08*.6=.048 + .0288=.0768 =7.68%
At year 2
III-

Equity=70% debt =30%= (35/50)*.12 + (15/50)*.08*.6=.084+.0144=.0984 =9.84%
At year 3
IV-

Equity= 100% debt=0%=1*.12 + 0*.08*.6=.12 =12%The WACC is increasing over time due to the increase inequity and reduction in debt amount.