Quiz 2a: Casco in problem 1

FIN630 - Quiz 2 - Fall 12

Problem 1
Interest expense = 150
Book value of debt = 2000
Pre-tax cost of debt = 4.00% ! Ignored time value of money: -1 point
Debt maturity 5 ! Used after-tax cost of debt: -0.5 points
Estimated market value = $2,311.63 ! Math errors: -0.5 point

c. Cost of capital computation

Debt = $ 2,311.63
Equity = $ 38,500.00
D/E = 6.00% ! Used book value: -1 point
Debt/EV = 5.66% ! Error in weights: -0.5 points

Unlevered beta = 1.15

Tax rate 40%
Levered beta = 1.1914 ! Used wrong beta: -1 point
Cost of equity = 10.15% ! Did not lever beta: - 0.5 point
After-tax cost of debt = 2.40% ! Used effective tax rate: -0.5 point
Cost of capital = 9.71% ! Did not after-tax cost of debt: -0.5 point

Problem 2
Year 0 Year 1-10 Year 10
Initial Investment (3,000)
Working Capital (140) 140 ! Ignored initial investment: -0.5 points
Revenue 2,000 ! Problems in working capital: -0.5 points
Expenses 1,500 ! Did not add back depreciation: -1 point
Incremental G&A (50)
Depreciation (300) ! Other Cashflow calculation errors: -0.5 to -1 points
EBIT 150 ! Recommendation errors: -0.5 points
taxes 60
operating cashflow 90
add back depreciation 300
FCF -$3,140 $390 $140

cost of capital 10%

NPV -$689.64

Problem 3
Opportunity Cost of Capacity -$213.98 !Opportunity Computation errors: -0.5 to -1 points
Research Study Sunk Cost !Included Sunk Cost: -0.5 points
New cashflows (forever) 90 ! No capital maintenance: -0.5 point
New NPV (2,453.98) !Terminal Value Errors: -0.5 to -1 points
 Quiz 2a: Casco in problem 1

tion errors: -0.5 to -1 points

on errors: -0.5 to -1 points