Pa

pe
rs

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To

pG

ra

de

Corporate Finance

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Question No: 1

=

NPV + NVP OF FINANCING

At year 1:
NPV= -50+40/ (1+.12)1
= -14.2857
NPV of financing = 50-(20+16)/ (1.08)1

Pa

=30

pe
rs

APV

APV effect at year 1= -14.2857 + 30
= 15.7143

de

At year 2:

NPV= -50+40/ (1+.12)1+20/ (1+.12)2
=1.658

ra

NPV of financing =50 - 21.6/ (1+.08)1-15.96/ (1+.08)2
=16.3169

pG

APV= 1.658 + 16.3169
=17.9749

At year 3:

To

NPV= -50+40/ (1+.12)1+20/ (1+.12)2-25/ (1+.12)3
=19.4527

NPV of financing= 50-21.6/ (1+.08)1-15.96/ (1+.08)2-15.48/ (1+.08)3
=4.0283

APV=19.4527 + 4.0283
=23.4810

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Question No: 2

pe
rs

At year 0
Cost of equity =12%
Cost of debt= 8%

Tax rate=40%

I- Equity=0 debt=100%
= (0*.12) + (1*.08*.6)

At year 1
II- Equity= 40% debt=60%

=.048 + .0288
=.0768 =7.68%

ra

At year 2

de

= (20/50) * .12 + (30/50)*.08*.6

Pa

=.048 =4.8%

III- Equity=70% debt =30%

pG

= (35/50)*.12 + (15/50)*.08*.6
=.084+.0144

=.0984 =9.84%

At year 3

To

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.

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Question No: 3

pe
rs

NPV using WACC
=-50+40/ (1+.0768)1+20/ (1+.0984)2+25/(1+.12)3
=-50+37.1471+16.5771+17.7949
NPV=21.5191

Pa

Question No: 4

Assumption: finding cost of capital using Miller & Modigliani
Rs=Ro+ (B/S) (Ro-Rb) (1-Tc)

rB
TC

= the required return on the equity of an unlevered firm
= the required return on the equity of a levered firm

de

Where r0
rS

= the pre-tax cost of debt
= the corporate tax rate

ra

B = the market value of the firm’s debt
S = the market value of the firm’s equity

pG

Year 1

=.12+1.5*.04*.6
=.1560=15.60%

Year 2

To

=.12+.43*.04*.6

=.1303 =13.03%

Year 3

=.12+0*.04*.6
=.12 =12%

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pe
rs

Question No: 5
FTE method

Year 3

=-50+40/ (1+.1560)1+20/ (1+.1303)2+25/ (1+.12)3

Pa

=24.6179

To

pG

ra

de

The NPV using FTE method is more than the method used in WACC and initial NPV.

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