EAC

1. Use EAC method. There are 2 new projects, and assume WACC is 8.5%, what is the EAC for each project? From the EAC, which one should you select? The cash flows for each project for each year are shown in the table below for you.

• Machine A: Costs $19,500, and cash inflows per year of $5,600. This project will have the life of 4 years.

• Machine B: Costs $12,400, and cash inflows per year of $4,620. This project will have the life of 3 years.

Project Analysis

2. Red Carabao produces softdrinks for sale in Asia. The firm's fixed costs, F, are $1,600,000. Each year, it sells 4 million bottles. Each bottle sells for $2.35, operating profits total $275,000, and the firm's assets (all equity financed) are $3.5 million. The firm estimates that it can change its production process, adding $1,000,000 to investment and $400,000 to fixed operating costs. This change will (1) reduce variable costs per unit by $0.20 and (2) increase output by 350,000 bottles, which it plans to sell them all, but (3) the sales price on all units will have to be lowered to $2.25 to permit sales of the additional output. The firm has tax loss carryforwards that render its tax rate zero, its cost of equity is 15%, and it uses no debt.

a) What is the incremental accounting profit? To get a rough idea of the project's profitability, what is the project's expected rate of return for the next year (defined as the incremental profit divided by the investment)? Should the firm make the investment (Compare the return of the project to its WACC)?

b) Would the firm's break-even point increase or decrease if it made the change? Hint: Calculating accounting break-even point will make net profit = 0

Capital Structure

3. True-2-U has the financial information down below.

ü Asset is $234,570 (book=market), which means your book equity value equals your market equity value

ü Current stock price is $6.70, and has 24,608 number of shares outstanding

ü However, the firm is considering selling bonds to increase its debt level. If it moves to a capital structure with 65% debt based on market values, to reflect the increased risk. In other words, the bondholders demand a higher return to compensate the higher leverage risk. Current rd = 6.75 %, new rd from the new additional bond sales = 9.0 %. (So, now it has 2 chunks of debt with different costs)

ü The current beta of the company (bL) is 1.54

ü EBIT is $11,540

ü This company EBIT has a current constant growth of 2.75%, and payout 45% of its earnings as dividend. However, once it

gets more capital from the new debt that it plans to raise, the new constant growth rate will be 8.5% because it will deploy this new capital to generate a higher growth rate for the company.

ü Tax rate is 20%, rM = 9% and rF is 4%

a) What is the current debt value? Weight of Debt in %? Hint: You know the equity value and the asset value from the given information, so you can find the debt value and % of debt.

b) What is the WACC before the change in capital structure?

c) What is the new WACC after the change in capital structure?

d) Find the intrinsic value of the firm before the change and what should be the intrinsic stock price. Why is the price per share trading in the market different from your calculated intrinsic stock price?

e) Find the intrinsic value of the firm after the change and what could be the intrinsic stock price, which can translate to the market stock price.

f) Should the firm go ahead with the change? How much does it affect the stock price in %?

Valuing a Company

4. If Amata forecasts its free cash flows growth for the 1st year to be 10%, 2nd year to be 10%, 3rd is 10%, and 2.5% thereafter.

• The weighted average cost of capital is 9.390%. However, after year 3, WACC will decrease by 0.5% thereafter.

• The current year, or year 0, FCF is 1,324.4 million baht.

• The company has 7,259 million baht in debt.

Assuming that the ROIC is expected to remain constant in Year 3 and beyond, what is the value of equity at Year 0, in millions? If the company has 1,067 million number of shares outstanding, what should its price per share be?

Attachment:- advanced_finance_assignment.zip