Date Year CDMA G4 WiFi i = 8%

12/13/2021 0 -8 -12 -20 Expected rate of return or required rate of return

12/13/2022 1 11 10 18
12/13/2023 2 7.5 25 32
12/13/2024 3 2.5 20 20
IRR 94% 116% 97%

Internal Rate of Return (IRR) vs Expected rate of return or Required rate of return

IRR> i Desirable
IRR< i Reject
IRR=i No profit no loss compared with "i". Break-even.

i is NOT the interest rate, it is WACC

WACC= Weighted Average Cost of Capital

Cost of Capital?
Capital? A=L+OE
% Liabilities % Owners'Equity= Capital Structure
CDMA
8
L:OE=60:40
Liabilities= 60% of 8= 4.8
OE=40% of 8 = 3.2

Cost of Liabilities or Cost of Debt = Interest

Cost of Equity= Dividend & Capital Gain
Capital Gain= Profit made from selling off shares in the secondary market

Cost of Equity can be calculated in two ways:

1. Dividend Discount Model
2. Capital Asset Pricing Model [CAPM]

Suppose
Cost of debt = 14%
Cost of equity = 17%

CDMA investment 8
Liabilities= 4.8
Owners'Equity= 3.2
Average of the two Costs = [14%+17%]/2 = 15.5%

Weighted Average Cost of Capital

=Weight of Debt x Cost of Debt x Tax Savings + Weight of Equity x Cost of Equity
= 60% x 14% x (1 - 35%) + 40% x 17%
= 12.26%
what is the application of 12.26% (WACC)?
THIS IS OUR i
THIS IS OUR BENCHMARK
 IRR = Internal Rate of Return
ired rate of return

IMPACT OF INTEREST ON TAX

INCOME STATEMENT
Sales Revenue 1,000 1,000
Less: Expenses 750 750
EBIT 250 250
Less: Interest 100 0 100 save
EBT 150 250 Taxes are calculated on the
Less: Tax [35%] 52.5 87.5 $35 tax increase
Net Income 98 163
Dividend 40 40
Addition to Retained Earnings 58 123
Taxes are calculated on the basis of EBT
$35 tax increase