Atlas Metals Breakpoints and decision rules 041911

Atlas Metals Breakpoints and decision rules 041911 - will...

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Atlas Metals Breakpoints and Decision Rules We ran out of time and I was less than clear on the breakpoints, so here is what you need to do. 1. Equity Breakpoint = % Equity Breakpoint $ amount of retained earnings common equity in capital + & structure D A Expense = - * = * $ amount of retained earnings 1 payout ratio Net Income retention ratio NI Note that common equity in capital structure is we in + + + = wstd wLtd wp we 1 . In our example, = -. * , , . + , , = , , Equity Breakpoint 1 3 49 470 000 57 8 249 000 69 001 632 2. Debt Breakpoint = % Debt Breakpoint $ amount of senior Debt available common Long term debt + & in capital structure D A Expense = , , $ amount of senior debt $41 000 000 in this case Note that long term debt in capital structure is wLtd in + + + = wstd wLtd wp we 1 . In our example, = , , . + , , = , , Debt Breakpoint 41 000 000 27 8 249 000 160 100 852 3. Determining the capital budget (Please note that the WACC below
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Unformatted text preview: will differ slightly from those done in class but the results are the same as far as the budget goes) Project IRR Value of Project (mil $) Cumulative Value (mil $) Breakpoint (mil $) WACC % A 18.3% $3 $3 11.49% B 17.6% $3 Choose A since A and B are mutually exclusive Atlas Metals Breakpoints and Decision Rules GP 1 17.3% $40 $43 11.49% FL 15.7% $65 $108 $69 12.38% GP2 14.0% $50 $158 12.38% LA 13.5% $32 $190 $160 12.75% TX 12.5% $47 $237 12.75% GP3 11.5% $20 $257 12.75% Note that TX and GP3 have IRRs less than the WACC of 12.75% and therefore should not be accepted as project in the capital budget. Note that A and B are mutually exclusive so we choose the one with the higher IRR. Choose A, GP1, FL, GP2 and LA as part of the Capital Budget since all have IRRs greater than 12.75%. The Capital Budget is $190M....
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Atlas Metals Breakpoints and decision rules 041911 - will...

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