Case 18

Year 0 2007 Investment Capital outley Δ Net Working Capital Cash outley NWC Investment Recovery Equipment Salvage NWC (full recovery) Sales Cost of Goods Sold (-) SG&A Expense (-) Opperating Savings (+) Depreciation (-) Operating Profit before tax (16,000,000)

Year 1 2008 (2,000,000) 400,000 (400,000)

Year 2 2009

Year 3 2010

1,000,000 (600,000)

1,000,000

4,000,000 3,000,000 200,000 2,000,000 3,000,000 (200,000)

10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000

10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000

Tax Expense (-) NOPAT Depreciation (+) NWC Investment Free cash flows 11% $820,733.69

(80,000) (120,000) 3,000,000 (400,000) (2,000,000) 480,000

1,000,000 1,500,000 3,000,000 (600,000) 3,900,000

1,000,000 1,500,000 3,000,000

(16,000,000) (16,000,000)

4500000

Should use WACC Cost of Capital

As we've previously discussed in class, WACC is typically the best number to use for cost of ca WACC=KdWd(1-T)+KeWe Ke=rF+B(MRP)
Market Value Of Equity=#of shares outstanding (market share price)

MV of Equity rF MRP 4.60% 6%

$

12,000

B # of shares MP of shares Total Debt

1.1 500 $24 3000

Tax

40%

Kd= WACC=KdWd(1-T)+KeWe WACC 9.6656%

Year 4 2011

Year 5 2012

Year 6 2013

1,000,000

1,000,000

1,000,000

1080000 1000000 10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000

10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000

10,000,000 7,500,000 500,000 3,500,000 3,000,000 2,500,000

1,000,000 1,500,000 3,000,000

1,000,000 1,500,000 3,000,000

1,000,000 1,500,000 3,000,000

4,500,000

4,500,000

6,580,000

st number to use for cost of capital

g (market share price)

BV of Debt Wd=D/D+E We=E/D+E

$

3,000 Debt+Equity 20% 80%

$

15,000

Ke Kd

11.200% Current Debt/Total (1 year bank rate) + Long term debt/total debt (A rated bond rate) Bank Rate + 1% 5.38%+1% Current Debt 500 Bank Rate 5.38% 6.38% Long Term 2500 A rated