Transcript
Daniella Mancini
Finance Project
Information of the firms
Unlevered Firm
Levered Firm
EBIT
10,000
10,000
Interest
0
3200
Taxable Income
10,000
6,800
Tax (34%)
3400
2312
Net Income
6,600
4,488
CFFA
6600
7688
Cost of Debt
8%
Unlevered Cost of Capital
10%
Systematic Risk of the asset
1.5
2
PV of tax shield
.34*3200
Annual tax shield
1088
PV=D*(Rd)*(Tc)/(Rd)
x * .08=3200
x=40,000
40,000*.08*.34/.08
PV of tax shield
$13,600
3
Size of debt
x*.08=3200
$40,000
4
Calculate the following values:
a)
Value of unlevered firm
Vu=EBIT*(1-T)/Ru
Ru=.10
EBIT=10,000
10000*(1-.34)/.10
$66,000
b)
Value of levered firm
VL=Vu+DTc
66000+.34*40,000
$79,600
c)
Equity Value
VL-size of debt
79,600-40,000
$39,600
d)
Cost of Equity
Re=Ru+(Ru-Rd)(D/E)(1-Tc)
Rd
0.08
Ru
10%
D/E
1.01010101
11.33%
e)
Cost of Capital
Ra=(E/V)Re+(D/V)(Rd)(1-Tc)
Rd
8%
Equity
$39,600
V
$79,600
Debt
$40,000
Ra
8.29%
f)
Systematic Risk of the Equity
BetaE=BetaA*(1+D/E)
3.01515
5
Debt to Equity Ratio is 1.0 , recalculate the systematic risk of the equity
BetaA*(1+1)
1.5*(1+1)
3
6
Crossover required rate of return for the two projects
Year
Project A
Project B
Difference
0
-$75,000
-$75,000
$0
1
$26,300
$24,000
$2,300
2
$29,500
$26,900
$2,600
3
$45,300
$51,300
-$6,000
IRR
14.60%
7
Are you going to accept project A or B?
WACC= Cost of Capital
8.29%
Project A NPV
$10,112.88
Project B NPV
$10,496.52
Accept Project B since NPV B > NPV A
