Section A Question One (40 Marks) Capthe Budgeting Blow ALL A private company by the name of Costa Investments Limited (CIL) has the following capital structure: Equity Capital Debt Capital Total Value Cost of Debt Beta Value $2,000,000 $3,000,0CO 8.5% 1.5 $5,000,000 (A). Using the above information calculate CIL's percentage of equity and debt capital. [2 Marks] (B). Using CAPM and the information in the table above calculate CIL's cost of equity. The risk free rate and rate of return on market are 6.5% and 20% respectively. [5 Marks] (C). Calculate CIL's weighted average cost of capital (WACC). CIL pays 22% corporate tax and the 8.5% cost debt is before tax cost of debt. [6 Marks] (D). CIL's $3,000,000 loan (debt) is for 20 years. Using the above information calculate the annual loan repayment of CIL's loan on an after tax basis (Hint: cost of debt minus tax = after tax cost of debt). [6 Marks] (E). Calculate CIL's present value (PV), net present value (NPV) and internal rate of return (IRR) using the net cash flow after loan repayment. Use WACC as the discount rate. Before loan repayment cash flows over the 5-year period are as follows: Before loan repayment cash flows for first two years is $200,000 per year; next two years is 300,000 per year. In year 5 the company CIL is expected to be sold for $4 million and in the same year the balance loan is to be paid off. So year-5 net cash flow is sale price minus the payment of the balance loan amount. Loan repayment starts in year-1 and reduces on yearly basis. For year zero the upfront cost is the owner's equity which is $2,000,000. [15 Marks] (F). Will you invest in CIL? Explain your answer, if yes why; if not why? [6 Marks]Question Two (Total 30 Marks) Cartel Budgetis Divided Potin In question one you calculated CIL's PV, NPV and IRR using the WACC based on the capital structure which you don't know if it was the optimal capital structure and hence the values maximised. Therefore, using the information in the table below, change CIL's capital structure and evaluate which debt/equity mix maximizes CIL's PVs, NPVs and IRRs. Annual net cash flows and corporate tax remain same as in question one. Equity Debt Cost of Equity Cost of Debt 0.20 0.80 35% 5.5% 0.50 0.50 13% 7.0% 0.80 0.20 11.5% 7.5% Discuss how CIL's value is maximized using different capital structures. Also make all necessary comments relevant to optimal capital structure and firm value maximisation. 15 62