Nmims Best April,May 2023 Assignments-You are helping a manufacturing firm decide whether it should invest in a new plant. The initial investment is expected to be Rs. 50 crores, and the plant is expected to generate after-tax cash flows of Rs. 5 crores for the next 20 years
Nmims Best April,May 2023 Assignments-You are helping a manufacturing firm decide whether it should invest in a new plant. The initial investment is expected to be Rs. 50 crores, and the plant is expected to generate after-tax cash flows of Rs. 5 crores for the next 20 years
Corporate Finance – I
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You are helping a manufacturing firm decide whether it should invest in a new plant. The initial investment is expected to be Rs. 50 crores, and the plant is expected to generate after-tax cash flows of Rs. 5 crores for the next 20 years. An additional incremental investment of Rs. 20 crores will be needed to upgrade the plant in 10 years. If the discount rate is 10%, estimate the net present value of the project. (10 Marks)
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Yellowstone Green Energy Ltd currently has 1.5 million common shares of stock outstanding and the stock has a beta of 1.2. It also has $ 10 million face value of bonds that have five years remaining to maturity and 7.5% coupon with semi-annual payments and are priced to yield 7.2%. If the company issues up to $ 2.5 million of new bonds, the bonds will be priced at par and have a yield of 7.2%; if it issues bonds beyond $ 2.5 million, the expected yield on the entire issue will be 8.4%. The company management has learnt that it can issue new common stock at $ 10 a share. The current risk-free rate of interest is 4% and the expected market return is 11%. The company’s marginal tax rate is 25%. If the company raises $ 10 million of new capital while maintaining the same debt-to-equity ratio, what would be its weighted average cost of capital? (10 Marks)
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Alpha go Computing Ltd is expected to generate $ 2,500,000 in revenues and $ 750,000 in operating earnings next year. Currently, the company does not use debt financing and has assets of $ 5,000,000. Suppose the company were to change its capital structure, buying back $ 2,000,000 of stock and issuing $ 2,000,000 in debt. If we assume that interest on debt is 8% and income is taxed at 25%, what is the effect of debt financing on the company’s net income and return on equity if operating earnings may vary as much as 40% from expected earning operating earnings in following circumstances?
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When the company has no debt, and (5 Marks)
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When the company has debt to total assets = 50%. (5 Marks)
