(a) Calculate the cost of equity of XYZ company using CAPM.

(b) Calculate the weighted average cost of capital (WACC) of XYZ company.

(c) Compute the cash flow from assets for the project for each year.

(d) Assume that the average WACC for the telecommunications industry is 10%.

(i) Should XYZ Company use its WACC computed from (b) or the average WACC for the telecommunications industry to calculate the NPV of the project? Explain.

(ii) Using the appropriate WACC from part (i), calculate the NPV of the project and justify whether XYZ Company should undertake the project.
 
 

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XYZ Company is operating in the telecommunications industry. It has recently clinched a new project. The project will take 4 years and has the same risk as the average risk of the company. The following table shows the information for operating cash flows in each year. Unit: In S Year Sales Fixed costs Variable costs Depreciation EBIT Taxes (25%) Net income (NOPAT) Operating Cash flows 1 2 3 4 5,000,000.00 5,250,000.00 5,512,500.00 5,788,125.00 500,000.00 500,000.00 500,000.00 500,000.00 2,625,000.00 2,756,250.00 2,894,062.50 2,500,000.00 100,000.00 1,900,000.00 100,000.00 100,000.00 100,000.00 2,025,000.00 2,156,250.00 2,294,062.50 506,250.00 539,062.50 573,515.63 475,000.00 1,425,000.00 1,518,750.00 1,617,187.50 1,720,546.88 1,525,000.00 1,618,750.00 1,717,187.50 1,820,546.88 XYZ Company is operating in the telecommunications industry. It has recently clinched a new project. The project will take 4 years and has the same risk as the average risk of the company. The following table shows the information for operating cash flows in each year. Unit: In S Year Sales Fixed costs Variable costs Depreciation EBIT Taxes (25%) Net income (NOPAT) Operating Cash flows 1 2 3 4 5,000,000.00 5,250,000.00 5,512,500.00 5,788,125.00 500,000.00 500,000.00 500,000.00 500,000.00 2,625,000.00 2,756,250.00 2,894,062.50 2,500,000.00 100,000.00 1,900,000.00 100,000.00 100,000.00 100,000.00 2,025,000.00 2,156,250.00 2,294,062.50 506,250.00 539,062.50 573,515.63 475,000.00 1,425,000.00 1,518,750.00 1,617,187.50 1,720,546.88 1,525,000.00 1,618,750.00 1,717,187.50 1,820,546.88 XYZ Company is operating in the telecommunications industry. It has recently clinched a new project. The project will take 4 years and has the same risk as the average risk of the company. The following table shows the information for operating cash flows in each year. Unit: In S Year Sales Fixed costs Variable costs Depreciation EBIT Taxes (25%) Net income (NOPAT) Operating Cash flows 1 2 3 4 5,000,000.00 5,250,000.00 5,512,500.00 5,788,125.00 500,000.00 500,000.00 500,000.00 500,000.00 2,625,000.00 2,756,250.00 2,894,062.50 2,500,000.00 100,000.00 1,900,000.00 100,000.00 100,000.00 100,000.00 2,025,000.00 2,156,250.00 2,294,062.50 506,250.00 539,062.50 573,515.63 475,000.00 1,425,000.00 1,518,750.00 1,617,187.50 1,720,546.88 1,525,000.00 1,618,750.00 1,717,187.50 1,820,546.88 XYZ Company is operating in the telecommunications industry. It has recently clinched a new project. The project will take 4 years and has the same risk as the average risk of the company. The following table shows the information for operating cash flows in each year. Unit: In S Year Sales Fixed costs Variable costs Depreciation EBIT Taxes (25%) Net income (NOPAT) Operating Cash flows 1 2 3 4 5,000,000.00 5,250,000.00 5,512,500.00 5,788,125.00 500,000.00 500,000.00 500,000.00 500,000.00 2,625,000.00 2,756,250.00 2,894,062.50 2,500,000.00 100,000.00 1,900,000.00 100,000.00 100,000.00 100,000.00 2,025,000.00 2,156,250.00 2,294,062.50 506,250.00 539,062.50 573,515.63 475,000.00 1,425,000.00 1,518,750.00 1,617,187.50 1,720,546.88 1,525,000.00 1,618,750.00 1,717,187.50 1,820,546.88

Answer rating: 100% (QA)

a Cost of Equity CoE The cost of equity CoE can be calculated using the Capital Asset Pricing Model CAPM The CAPM states that the expected return on a... View the full answer