University:
York University
Course:
ADMS 2541 | Introduction to Personal Finance
Academic year:

2021
Views:

465

Pages:

2
Author:

Niklas

1) FCF (Free Cash Flow) FCF = EBIT * (1 - t) + Dep - ΔNWC - CAPEX - opp. cost FCF = (Sales - Expenses - Dep) * (1 - t) + Dep - ΔNWC - CAPEX - opp. cost a) Depreciation per Year: Dep/year = (625,000 - 225,000) / 16 = 25,000 b) Net Salvage Value (NSV) at the end of year 5: NSV = BV - L(BV - Salvage Value) NSV = 380,000 - 0.21(380,000 - 54,500) = 344,650 FCF Calculations: FCF₁ = (175,000 - 45,000 - 16,000) * (1 - 0.21) + 16,000 - 20,000 - 625,000 - 0 = -645,000 FCF₂ = 106,060 FCF₃ = 106,060 FCF₄ = 106,060 FCF₅ = 106,060 + 380,000 2) WACC (Weighted Average Cost of Capital) WACC = (D / (D + E)) * rD + (E / (D + E)) * rE Debt (D): 629,000 bonds, 3% coupon, 20 years, 850 = 170,000,000 Equity (E): 4,000,000 shares, $25 per share = 100,000,000 WL = E / (D + E) = 0.3704 rD = I / Y = 11.601% (assuming annual payments) rE = 10.59% (given) WACC = 0.3704 * 11.601 + (1 - 0.3704) * 10.59 = 10.225% 3) NPV and IRR: NPV = ∑(CFt / (1 + r)^t) = -645,000 + 106,060 / (1 + 0.10225) + ... + 534,710 / (1 + 0.10225)^5 = 10,225 IRR = 11.06% (using trial and error or a financial calculator) Cash Flow Information: Year 0: Initial investment cost: $625,000 Initial increase in net working capital: $20,000 Years 1-5: Annual sales: $175,000 Annual expenses: $45,000 Straight-line depreciation to book value of $225,000 with a useful life of 25 years Year 5: Stop operations 70% of net working capital retrieved Market value: $380,000 Tax rate: 21% WACC Information: Stock: 4 million shares outstanding Current price: $25 Shareholder equity: $100 million Projected annual dividend (D1): $2.50 Dividend growth rate: 3% per year Debt: 200,000 bonds outstanding Current price: $850 Face value: $1,000 Time to maturity: 6 years Coupon rate: APR Coupons paid out annually Tasks: Find the free cash flows for years 0-5 (40 points). Find the NPV (Net Present Value) (5 points). Find the payback period (5 points). Calculations: Free Cash Flows (FCF): FCF = EBIT * (1 - t) + Dep - ΔNWC - CAPEX - opp. cost ... (calculations omitted for brevity) NPV: NPV = PV(Cash Inflows) - Initial Investment ... (calculations omitted for brevity) Payback Period: Cumulative cash inflows after each year: Year 1: 106,060 Year 2: 212,120 Year 3: 318,180 Year 4: 424,240 Year 5: 958,950 Payback period = 4 years + (645,000 - 424,240) / 534,710 = 4.4129 years