Marie Tess Co. wants to evaluate a potential investment decision. Ex Corp. and Way Corp. are being eyed for this investment. Ex Corp is a pretty stable firm with a net income of P500,000. Ex maintains increases in operating receivables at P375,000 and operating payables at P625,000 at an average. Way is operating with a specialized equipment that is forecasted to function for 15 more years. Each year, the firm is expected to generate P2 Million after-tax cash flows. However, P2.5 Million of liabilities are to be assumed by Marie Tess. Marie Tess Co. will use their weighted average cost of capital for any investment evaluation. Their debt to equity ratio is kept at 2 is to 1, while credit spread is at 5%. Risk free rate remains at 7%, which is 4% lower than the market. A beta of 2 is assessed for the company. Tax of 30% applies to Marie Tess Co., while capital investments are nontaxable. 

1. What is the Weighted Average Cost of Capital? 

2. What is the estimated value of Ex Corp. using income- based valuation? 

3. What is the estimated value of Way Corp. using liquidation based valuation? 

4. What amount of advantage (disadvantage) would Marie Tess have if they decide to invest with Ex Corp.? 

EZ Co. and BB Co. are two comparable companies at which EVA is something that they consider a lot about. Even though they have the same Total Assets of P2 Million, BB Co. has twice the amount of debt than EZ's P600,000. The risk free rate is currently at 3%, which is 8% lower than market. Due to their capital structure, EZ Co. has a debt spread of 1%, which is half of BB's, while BB's beta is half as much as EZ's. Given that BB earned P150,000 this year (after tax), BB's EVA is still lower by P15,000 or 30% when compared to EZ. Both companies are taxed at 35%. (round off to 6 DIGITS for BETA) 

5. What is EZ's EVA? 

6. What is BB's cost of equity?

7. What is EZ's cost of Equity 

8. What is BB's WACC? 

9. What is EZ's WACC? 

10. What is EZ's Net Income?

Answer rating: 100% (QA)

Answer 1 Calculation of Weighted Average Cost of Capital WACC for Marie Tess Co DebttoEquity ratio 2... View the full answer