- Ch 18 - Capital Budgeting Case Data Given: Debt/Equity of project= 40% ; debt amt = 40% of 18.5m T = 28% Levered equity 15% Debt Issue $ 9.57 m retiring at the end of year 3. IR = 8% PMT = $3.19 m YEAR 0 1 UCF -18.5 m 5.79 m 9.59 m 8.89 m 2 3 Calculate Value of the Project. What would happen if there is a flotation cost? = Hints: 1. APV = NPV (UCF) at Ro+NPV (Financing at Rg) 2. RS = RO +(B/S)(RO - RB)(1 - TC) 3. NPV (debt financing) = Proceeds - Aftertax PV(Interest Payments) PV(Principal Payments) 4. Each year, an equal principal payment will be made, which will reduce the interest accrued during the year. 5. Given a known level (AMT) of debt, debt cash flows should be discounted at the pretax cost of debt, 6. Use APV if the project's level of debt is known over the life of the project. Use WACC or FTE if project uses firm's target D/V ratio over project's life. Use ?? because the level of debt for the project is known throughout the life of the project APV = NPV (UCF) at Ro + NPV (Financing at RB) 1. Find NPV (UCF) discounted at Ro RS = RO+ (B/S)(RO-RB) (1 - TC) Ro= YEAR Discounted at ? PV of UCF UCF -18.5 5.79 1 O Nm 2 9.59 3 8.89 NPV= 2. Find PV (debt financing) NPV (debt financing) = Proceeds - Aftertax PV(Interest Payments) PV(Principal Payments) Interest PMT=8% of loan balance PV at? a. Aftertax PV(Interest Payments) YEAR AT=(1-1) 0 72% 1 72% 2 72% 3 72% PV of Aftertax PV(Interest Payments) $ b. PV(Principal Payments) YEAR Repayment of Principal PV at? 0 1 2 Nm 3 PV(Principal Payments) = C. NPV (debt financing) = Proceeds - Aftertax PV(Interest Payments) - PV(Principal Payments) NPV (debt financing) = m 3. APV = NPV (UCF) at Ro+NPV (Financing at RB) = #1+#2c = m * 4.. In the event there are flotation cost, then Total flotation cost = loan amount * flotation cost % The Annual floation cost will be: ? a. ? b. ? c. ? NPVLoan = Proceeds net of flotation costs - Aftertax present value of interest and principal payments + Present value of the flotation cost tax shield - Ch 18 - Capital Budgeting Case Data Given: Debt/Equity of project= 40% ; debt amt = 40% of 18.5m T = 28% Levered equity 15% Debt Issue $ 9.57 m retiring at the end of year 3. IR = 8% PMT = $3.19 m YEAR 0 1 UCF -18.5 m 5.79 m 9.59 m 8.89 m 2 3 Calculate Value of the Project. What would happen if there is a flotation cost? = Hints: 1. APV = NPV (UCF) at Ro+NPV (Financing at Rg) 2. RS = RO +(B/S)(RO - RB)(1 - TC) 3. NPV (debt financing) = Proceeds - Aftertax PV(Interest Payments) PV(Principal Payments) 4. Each year, an equal principal payment will be made, which will reduce the interest accrued during the year. 5. Given a known level (AMT) of debt, debt cash flows should be discounted at the pretax cost of debt, 6. Use APV if the project's level of debt is known over the life of the project. Use WACC or FTE if project uses firm's target D/V ratio over project's life. Use ?? because the level of debt for the project is known throughout the life of the project APV = NPV (UCF) at Ro + NPV (Financing at RB) 1. Find NPV (UCF) discounted at Ro RS = RO+ (B/S)(RO-RB) (1 - TC) Ro= YEAR Discounted at ? PV of UCF UCF -18.5 5.79 1 O Nm 2 9.59 3 8.89 NPV= 2. Find PV (debt financing) NPV (debt financing) = Proceeds - Aftertax PV(Interest Payments) PV(Principal Payments) Interest PMT=8% of loan balance PV at? a. Aftertax PV(Interest Payments) YEAR AT=(1-1) 0 72% 1 72% 2 72% 3 72% PV of Aftertax PV(Interest Payments) $ b. PV(Principal Payments) YEAR Repayment of Principal PV at? 0 1 2 Nm 3 PV(Principal Payments) = C. NPV (debt financing) = Proceeds - Aftertax PV(Interest Payments) - PV(Principal Payments) NPV (debt financing) = m 3. APV = NPV (UCF) at Ro+NPV (Financing at RB) = #1+#2c = m * 4.. In the event there are flotation cost, then Total flotation cost = loan amount * flotation cost % The Annual floation cost will be: ? a. ? b. ? c. ? NPVLoan = Proceeds net of flotation costs - Aftertax present value of interest and principal payments + Present value of the flotation cost tax shield