Question

Your firm which is an addition of new headquartered in US is considering a 5-year international project, product line to your existing product lines in Europe. The new product line would require a purchase of new equipment with a price of€600,000. The equipment will be depreciated entirely to 0 using straight-line method for 5 years The new product line is expected to generate €760,000 for year 1 and to increase its sales at a growth rate of 3% for next 4 years. Production costs (excluding depreciation) are estimated at €500,000 for year 1 and will also increase by 3% per year. Selling and administration expenses will remain at € 90,000 per year. Net working capitals (NWC) is projected to remain at 10% of projected sale of each year and will be financed through operating cash flow at the end of each year. Any remaining NWC will be fully recovered in cash at the sale of the equipment at the end of fifth year. To finance this project (E600,000), you plan to issue 5-year annual euro-denominated bonds at par in Europe. According to your financial advisor, you can raise up to €300,000 by issuing 5-year annual 12% coupon bonds at par. However, you need to issue 5-year annual 14% coupon bonds at par for additional capitals above 300,000 Below is the information you will use to estimate the cost of capitals. Your target capital structure depends choose only whether you will issue new equity market (US or equities in Europe equities or US. You should on Europe) to issue new one Equity Market Equity Risk Premium US Europe 7% 6% Risk free rate 4% 4% 1.0 Beta 0.9 Target (Debt/(Debt+Equity) capital structure 0.5 0.6 The project will pay a 40% tax rate. The current exchange rate between USD and Euro is $1/€ and remains constant. You assume that EBT (Earing Before Tax) is the same as taxable income

If you choose to issue new equities in Europe, you are expected to pay a dividend of €4 per share in first year and the dividend will increase at a rate 3% per year afterwards.

1. Calculate total amount of debts you need to issue in order to meet your target capital structure.
2. Calculate the number, not amount of equities(stocks) you need to issue (Use Gordon constant growth model)
3. Calculate after-tax cost of debts and cost of capitals.
4. Estimate annual expected cash flow from operation.
5. Calculate NPV

Answer 1

ANSWER US & ESD 16 The eechange te becueen AS 8Aven f18use& as he take we US. cecrded enuities Dew 8Sue tc 1Cote) 6000000 3 00000 G0000 00 XO.S 3000 00 So Debt 3 00000 euity meu 7,a0 1-4o) debt = 120 X Afteo-tae cost of euity Cost af using CApm1 ke = RFR + COst Beta eUty RSK Psemium ie

kd) (wt WACC (tdt .d X EXKe e. (50% . ao) s0% xq.y ).30% debts needed pmoum to be onder toog ex Captal to Meat stoructwie 300000 Aftes tQR delot cost e1.8% of Cost erutt y of 9.49% WACC 8.30% Aalerpectd ahlat Year athttial cost Opexating cash flouas A, Sales Revenue 855 38 7 806984 830473 760000 789800 5687S4 -S30450SH 6364 prducton Soco00 51so0o Costs - 90,000 3 S&A erperses -90,000-90006 d0o00 90,600 /a0ooo Dep fbooooo 20c00 po00-1900601 0000 EQT(t913) 7Hi09 ga632 50,000 $7 800 6S834 5

-26334 D964433053 -23120 Pare at 4oo -20poo 6 . 59hn n 49879 34680 29500 30,000 EAT 1201000 a0,000 Add aack 190,000 190, DO0 0,000 Depn opesat ing cash Flow 154680 150,000 Isq 500 1644GS 16qS79 NWc cash Flous 8 3047 8SS39 lo eeginng Nit T6000 78 a80 80622 endtrt 8 S529 2 3047 Nwc 76000 80628 78 a80 change gss39 -a419 -2348 - 2280 7600D (10-1) NuW C Total abnual (3 cash Flouos 169332 157082 16197 SS 19 (a+9+12)676000 477a0 44 Py F at 8.30 0.99336 0.gs9b0,787as o,7a692 O,67121 4 0g 30 h 1S, pUal , 20 616000 136 394 2977 13663 11838 11 7742 t13 X) 16. NPV (Sum OF

sbield Ofth Phteest expested cash Aocos ADrual Year 1 a. intial cost 600000 Product ton -5691SH 63 0450-54 6364 Eo0000-S IS Cost& - 9000 qo poo q0poo {0,000 90,00 3. 6&A eap Depn - (20,000 -190000 -20poo -00 O00-10 pO0 ( 600000 8 8638 74104 65834 57800 (+37 S0,o00 5.E8 33053 96 4 9 3/20-6 334 6. na at uo% -20,000 uy46s 34680 39S00 30,000 EAT Add Back 190,000 190,000 [90,p00 120,000 20,000 bepn 8, Add nt eMest ta 14400 /4400 shiedd /36000 4400 14400 %ahx decreased tax ep

(S) operating cash flow (7+8 +9a) 169080 16u400 113900 Lb85998L1 Nwc cash FloS 83047 8Ss39 78 980 76000 S0698 lo. aeaiMna Noc Endrng 85539 83047 80688 NLOC 76000 78a80 . 1a change C1o-) -a491 8s 539 a419 -76000 9080 - 9248 Rotal hhua cad flous 3 76374 369 SI8 -61600 16a/20 166732 11H82 ataH2) 4 PV F at g,30% 0,92336 0 85260 18 7850,79692 0.6712} I, ρν α δ,3016 (13 XH) 616000 14969S 4alss 13ygg9 198 910 Eobo81 16. NPV (SUN Of 1s) 59162 ma.