XYZ Company is operating in the telecommunications industry. It has recently clinched a new project. The project
Question:
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.
Table | 1 | 2 | 3 | 4 |
Sales | 5,000,000.00 | 5,250,000.00 | 5,512,500.00 | 5,788,125.00 |
Fixed costs | 500,000.00 | 500,000.00 | 500,000.00 | 500,000.00 |
Variable costs | 2,500,000.00 | 2,625,000.00 | 2,756,250.00 | 2,894,062.50 |
Depreciation | 100,000.00 | 100,000.00 | 100,000.00 | 100,000.00 |
EBIT | 1,900,000.00 | 2,025,000.00 | 2,156,250.00 | 2,294,062.50 |
Taxes (25%) | 475,000.00 | 506,250.00 | 539,062.50 | 573,515.63 |
Net income (NOPAT) | 1,425,000.00 | 1,518,750.00 | 1,617,187.50 | 1,720,546.88 |
Operating Cash Flows | 1,525,000.0 | 1,618,750.00 | 1,720,546.88 | 1,820,546.88 |
Net capital spending is $1.7 million at the beginning. Net working capital of $5 million is required initially and will be recovered at the end of the project. There will be after-tax salvage value of $100,000 at the end of the project.
To help finance this project, the company will issue a 4-year bond which has a before-tax cost of 7.49%. The money collected is $9.5 million
The tax rate is 25%. Beta of the company is 1.2. The risk-free rate is 2% while the market risk premium is 5%. The Company has 10 million common shares with a market price of $2 per share.
(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
Modern Advanced Accounting in Canada
ISBN: 978-1259087554
8th edition
Authors: Hilton Murray, Herauf Darrell