Question: 01

Answer:

Year CF (Chinese) CF (Indian) Difference

0 (400,000.00) (300,000.00) (100,000.00)
1 50,000.00 80,000.00 (30,000.00)
2 75,000.00 90,000.00 (15,000.00)
3 95,000.00 100,000.00 (5,000.00)
4 140,000.00 110,000.00 30,000.00
5 180,000.00 120,000.00 60,000.00
6 225,000.00 120,000.00 105,000.00
7 250,000.00 140,000.00 110,000.00

(a) IRR 22.28% 27.14% IRR of Chinese Machine and Indian Machine are 22.28% and 27.14
(b) Crossover Rate 13.92% Cross over rate is 13.92%

(c) NPVs of the two options using discount rate are shown in below table
Discount Rates 10% 12% 14% 16% 18%
Chinese Machine $241,496.808 $190,240.193 $144,485.910 $103,531.131 $66,775.103
Indian Machine $211,459.965 $176,476.881 $144,997.349 $116,590.733 $90,887.468

(d)
NPV Profi le
$300,000.000
$250,000.000
$200,000.000
$150,000.000
$100,000.000
$50,000.000
$0.000
10% 12% 14% 16% 18% 20% 22% 24% 26% 28%
($50,000.000)
 $250,000.000
$200,000.000
$150,000.000
$100,000.000
$50,000.000
$0.000
10% 12% 14% 16% 18% 20% 22% 24% 26% 28%
($50,000.000)
($100,000.000)

Chinese Machine Indian Machine

(e ) If cost of capital is 12%, the Chinese Machine must be selected because its has a higher NPV compared to the Indian

(f) NPV is better tan IRR because IRR cant be discounting a project’s future cash flow at predefined rates known NPV
that intermediate cash flow is reinvested at cutoff rate while under the IRR approach.
Low-risk projects are unlikely to have a high internal rate of return where businesses to pursue projects with high
 EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690

n Machine are 22.28% and 27.14% respectively

20% 22% 24% 26% 28%

$33,702.703 $3,870.893 ($23,102.502) ($47,548.085) ($69,752.646)
$67,569.373 $46,361.657 $27,026.281 $9,356.447 ($6,828.017)
gher NPV compared to the Indian Machine.

w at predefined rates known NPV’s presumption is

oach.
sses to pursue projects with higher IRR with higer risk
Question: 2

Answer: The Cash Flow table is give below

Year Cash Flow
0 (60,000.00)
1 30,000.00
2 32,000.00
3 34,000.00
4 (34,000.00)
5 38,000.00
6 40,000.00
7 42,000.00
8 44,000.00

a The IRR of the Project is 40.5171%

b The MIRR is 26.4028%
c The NPV with 18% is $47,880.2009

d
The Project NPV is Positive. So the project can be recommended and sonnitron can expect profit
the rate 18% where it will be positive for Investor.
EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690
Question:

The Cash Flow of Project X:

Year Cash Flow Certainty Equivalent Coefficient

0 (260,000.00) 1
1 40,000.00 0.9
2 75,000.00 0.9
3 92,000.00 0.8
4 105,000.00 0.8
5 115,000.00 0.7
6 125,000.00 0.6
292,000.00

(a) The NPV 24,236.929

(b) As the NPV $24,236.929 is positve, The Project Can be seletcted as Cash flow positive and it will asses the R

(c)
If there is no Adjusment taken for Risk, Based one one Discount rate, there Project will be high Risk. Investor will no
the returns not correpoding to the risk. So Investment on these risky projects based on one discount rate will ulitim
destroy wealth for the share holders.
 EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690

Certainty Equivalent Cash Flow

(260,000.00)
36,000.00
67,500.00
73,600.00
84,000.00
80,500.00
75,000.00
156,600.00

h flow positive and it will asses the Risk.

ect will be high Risk. Investor will not invest as

ased on one discount rate will ulitimately
Question:

Given That,
Bond Investment, WD 0.4
Share Holder Investment, WE 0.6
ROE 30%
Share Price, P0 280
Payout Ratio 65%
EPS 60
Expected Devident, D1 39
KD 16%
Tax Rate 35%

We know, Growth Rate, g `=ROE*(1-Payout Ratio)

10.50%

(a) Ke `=(D1/P0)+g
24.429%
(b) WACC of Zosano `=Wd*Kd*(1-t)+We*Ke
18.817%
EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690
Question

Purchase Price 720,000.00

Shipping and Installation 100,000.00
Modification Cost 32,000.00
Depreciable Basis 852,000.00
Investment in Working Capital 100,000.00
Salvage Value, SV 100000
Net Book Value, BV 75000
Tax Rate, Tx 40%
Net Salvage Value, `=SV-Tax (SV-BV) 90000
Initial Outlay 862,000.00
EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690
Question

WACC 18%
Project Risk Class IRR Risk Group
M Lowest 12.40% Lowest
N Above Average 20.80% Above Average
P Highest 25.90% Highest
Q Below Average 14.97% Below Average
R Average 18.90% Average
S Lowest 11.80% Lowest
T Above average 21.40% Above Average
 EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690

Required Rate of Return Desicion Rule

12.00% Accept IRR > Adjusted required return
21.00% Reject IRR < Adjusted required return
24.00% Accept IRR > Adjusted required return
15.00% Reject IRR < Adjusted required return
18.00% Accept IRR > Adjusted required return
12.00% Reject IRR < Adjusted required return
21.00% Accept IRR > Adjusted required return
Question:

Project X Project Y
NPV(tk) 5,205.63 6,278.84
Year, n 4 6
Discount Rate, i 22% 22%
PVIFAi,n 2.49 3.17
(a) EAA 2,087.56 1,982.63

(b)
Project X must be selected as it creates more value per year if this project is renewed and is the batter ch
then the project Y.
 EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690

newed and is the batter choice

Question

Total Capital
Current Equity 80,000,000.00
Retained Earning 10,000,000.00
Current Long term Debt 30,000,000.00
Unknown New Capital 40,000,000.00

Total Amount 160,000,000.00

Limits
Debt Ratio 40% 64,000,000.00
Current debt 30,000,000.00
(a) Availvale Debt Capacity 34,000,000.00

TIE 6 6.00
EBIT 30,000,000.00
Interest 11% 3,300,000.00
Allowable Interest 5,000,000.00
Interest Slack 1,700,000.00

New Interest Rate 13%

(b) New Debt Capacity 13,076,923.08

EBIT New Interest Rate Current Interest TIE

30,000,000.00 0.13 3,300,000.00 6

© New Debt capapcity 13,076,923.08

Lower of the two effective available 13,076,923.08
New debt acoording to Tie Ratio 100,591,715.98
 EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690

Shalala Can add MaximumDebt.

Question

New Capital Required 250,000.00

Current Debt 900,000.00
Current Debt Rate 12%
New Rate Debt 14%
Share Outstanding 72,000
Share Price 16
Number of New Shares if Shares Issued 15,625
Tax Rate 27%

(a) Issuing New Common Shares

(b) Option 1
EBIT 450,000.000 600,000.000
Interest 108,000.000 108,000.000
EBT 342,000.000 492,000.000
Taxes 92,340.000 132,840.000
Earnings after taxes 249,660.000 359,160.000
Number of shares 87,625.000 87,625.000
EPS 2.849 4.099

At Indifference Point
EBIT Option 1
Interest 304,280.000
EBT 108,000.000
Taxes 196,280.000
Earnings after taxes 52,995.600
Number of shares 143,284.400
EPS 87,625.000
1.635
 Indifference Point

© Shares Outstanding in Option 1, S1 87,625.000

Interest Expense for Option 1, i1 108,000.000
Shares Outstanding in Option 2, S2 72,000.000
Interest Expense for Option 1, i2 143,000.000
Hence Indifference Point 304,280.000

(d) Issuing New Co

Optio
EBIT 200,000.000 250,000.000
Interest 108,000.000 108,000.000
EBT 92,000.000 142,000.000
Taxes 24,840.000 38,340.000
Earnings after taxes 67,160.000 103,660.000
Number of shares 87,625.000 87,625.000
EPS 0.766 1.183
Issuing
Optio
EBIT 200,000.000 250,000.000
Interest 143,000.000 143,000.000
EBT 57,000.000 107,000.000
Taxes 15,390.000 28,890.000
Earnings after taxes 41,610.000 78,110.000
Number of shares 72,000.000 72,000.000
EPS 0.578 1.085

EBIT EPS
5.000
4.500
4.000
3.500
3.000
2.500
EPS

Equity issue is preferred

2.000
1.500
1.000
0.500
-
200,000.000 250,000.000 300,000.000 350,000.000 500,000.000 550,000.000 600,0

EBIT

Option 1 Option 2
0.500
-
200,000.000 250,000.000 300,000.000 350,000.000 500,000.000 550,000.000 600,0

EBIT

Option 1 Option 2
 EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690

Issuing Debt
Option 2
450,000.000 600,000.000
143,000.000 143,000.000
307,000.000 457,000.000
82,890.000 123,390.000
224,110.000 333,610.000
72,000.000 72,000.000
3.113 4.633

At Indifference Point
Option 2
304,280.000
143,000.000
161,280.000
43,545.600
117,734.400
72,000.000
1.635
 Issuing New Common Shares
Option 1
300,000.000 350,000.000 500,000.000 550,000.000 600,000.000
108,000.000 108,000.000 108,000.000 108,000.000 108,000.000
192,000.000 242,000.000 392,000.000 442,000.000 492,000.000
51,840.000 65,340.000 105,840.000 119,340.000 132,840.000
140,160.000 176,660.000 286,160.000 322,660.000 359,160.000
87,625.000 87,625.000 87,625.000 87,625.000 87,625.000
1.600 2.016 3.266 3.682 4.099
Issuing Debt
Option 2
300,000.000 350,000.000 500,000.000 550,000.000 600,000.000
143,000.000 143,000.000 143,000.000 143,000.000 143,000.000
157,000.000 207,000.000 357,000.000 407,000.000 457,000.000
42,390.000 55,890.000 96,390.000 109,890.000 123,390.000
114,610.000 151,110.000 260,610.000 297,110.000 333,610.000
72,000.000 72,000.000 72,000.000 72,000.000 72,000.000
1.592 2.099 3.620 4.127 4.633

00.000 500,000.000 550,000.000 600,000.000

IT

Option 2
00.000 500,000.000 550,000.000 600,000.000

IT

Option 2
Question

Lease Option Annual Payment 2,300,000.00

Equipment Price/Borrowed Amount 6,000,000.00
Borrowing Rate 12%
Overhaul Cost 600,000.00
Tax Rate 40%
Salvage Value 150,000.00
Borrow and Buy
Annual Installment Calculation
(a) Year Beginning Balance Payment
1 6,000,000.000 1,664,458.392
2 5,055,541.608 1,664,458.392
3 3,997,748.210 1,664,458.392
4 2,813,019.603 1,664,458.392
5 1,486,123.564 1,664,458.392

Year Depreciate % Depreciation

Year 1 40% 2,400,000.00
Year 2 25 1,500,000.00
Year 3 20 1,200,000.00
Year 4 15 900,000.00
Year 5

Present Value of Cash Outflows

Year 1 Year 2
Loan Payment 1,664,458.392 1,664,458.392
Tax Savings on Interest (288,000.000) (242,665.997)
 Tax Savings on Depreciation (960,000.000) (600,000.000)
After Tax Maintainance Cost 420,000.000 420,000.000
After Tax Overhaul Cost - -
Net Salvage Value - -
Total Cash Outflow for Buy Decision 836,458.392 1,241,792.394

Hence PV Of Cash Outflow $5,099,811.11

(b) Lease Option

Present Value of Cash Outflows
Year 1 Year 2
Least Cost After Taxes 1,380,000.000 1,380,000.000
Purchase Option - -
Total Cash Outflow for Lease Option 1,380,000.000 1,380,000.000

Hence PV Of Cash Outflow $4,974,591.159

© Lease Option is more suitable hence it has lower Cash Outflow.

 EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690

Interest Principal Ending Balance

720,000.000 944,458.392 5,055,541.608
606,664.993 1,057,793.399 3,997,748.210
479,729.785 1,184,728.606 2,813,019.603
337,562.352 1,326,896.039 1,486,123.564
178,334.828 1,486,123.564 -

Year 3 Year 4 Year 5

1,664,458.392 1,664,458.392 1,664,458.392
(191,891.914) (135,024.941) (71,333.931)
 (480,000.000) (360,000.000) -
420,000.000 420,000.000 420,000.000
360,000.000 - -
- - (90,000.000)
1,772,566.478 1,589,433.451 1,923,124.461

Year 3 Year 4 Year 5

1,380,000.000 1,380,000.000 1,380,000.000
- - -
1,380,000.000 1,380,000.000 1,380,000.000
Questions

Current Year Next Year % Change

Production Volume 500,000 575,000
Price Per Unit 40 40
Sales 20,000,000 23,000,000 15%
Variable Cost 45% 9,000,000 10,350,000
Gross Profit 11,000,000 12,650,000
Fixed Costs 1,200,000 1,400,000
Depreciation 1,150,000 1,100,000
EBIT 8,650,000 10,150,000 17%
Interest 650,000 650,000
EBT 8,000,000 9,500,000
Tax 35% 2,800,000 3,325,000
Net Income 5,200,000 6,175,000
Number of Shares 750,000 750,000
EPS 6.93 8.23 19%
(a) DOL = % change in EBIT / %change in Sales
DOL= 1.156

(b) DFL = % change in EPS / %Change EBIT

DFL= 1.081

(c) DTL= DOL * DFL

DTL= 1.250
EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690
Question:

(a) As we know , small size project has higher IRR , though the project value is less. So for different size project we shou
We need to Choose Project with Highest NPV, Reject Others. NPV must be positive.

(b)
Capital planning choices should be made based on Common life analysis. NPV and IRR have to analyse fully.

©
When project risk is different certainaity equivalents are used to determine the best Certainty Equivalents are betw
Exchanges Risky Cash Flows for Risk-Free Flows. A risky Cash Flow of Taka 2,00,000 may be exchanged for a risk-fre
Factor of .8
Discount the Risk-free flows at risk-free rate and rate of return must be adjusted to compensate investor for the ris
 EMB 660-Corporate Finance
Final Assignment
Aminul Islam, ID: 2016209690

erent size project we should decide based on NPV.

ve to analyse fully.

inty Equivalents are between 0 and 1.

e exchanged for a risk-free Flow of Taka 1,60,000. This implies Certainty Equivalent

ensate investor for the risk.