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Case Study 10 - Effective tax rate 35 Equity financing...

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Effective tax rate: 35% Equity financing option: Investment Salvage value Annual Cash Flow Initial investment cost: $1,500,000.00 Year - - Revenue Dividend payments Net cash flow Afer-tax NCF Price per share of stock: $15.00 0 $(1,500,000.00) $- $- $- $(1,500,000.00) $(1,500,000.00) Initial dividends on stock: $0.50 1 $- $- $300,000.00 $(50,000.00) $250,000.00 $162,500.00 Dividend growth rate (g): 5% 2 $- $- $300,000.00 $(52,500.00) $247,500.00 $160,875.00 Number of shares: 100000 3 $- $- $300,000.00 $(55,125.00) $244,875.00 $159,168.75 Number of vans: 200 4 $- $- $300,000.00 $(57,881.25) $242,118.75 $157,377.19 Salvage value per van: $1,000.00 5 $- $- $300,000.00 $(60,775.31) $239,224.69 $155,496.05 Total salvage value: $200,000.00 6 $- $- $300,000.00 $(63,814.08) $236,185.92 $153,520.85 7 $- $- $300,000.00 $(67,004.78) $232,995.22 $151,446.89 Annual dividend prices 8 $- $- $300,000.00 $(70,355.02) $229,644.98 $149,269.24 Year Price per share 9 $- $- $300,000.00 $(73,872.77) $226,127.23 $146,982.70 0 $- 10 $- $200,000.00 $500,000.00 $(77,566.41) $622,433.59 $404,581.83 1 $0.50 IRR 3% 2 $0.53 3 $0.55 4 $0.58 5 $0.61 6 $0.64 7 $0.67 8 $0.70 9 $0.74 10 $0.78 Effective tax rate: 35% D/E 50%-50% mix D/E mix: 50% Principal: $1,500,000.00 Debt: $750,000.00 Equity: $750,000.00 Loan interest : 8% Loan Balance Annual Payment Interest Paid Annual NCF analysis Year Debt capital Debt capital Debt capital Revenue Dividends Paid Taxable Income Before-taxes NCF Taxes After-tax NCF 0 $750,000.00 $- $- $- $- $(750,000.00) $(750,000.00) 1 $698,227.50 $111,772.50 $60,000.00 $300,000.00 $(25,000.00) $215,000.00 $163,227.50 $75,250.00 $147,977.50 2 $642,313.20 $111,772.50 $55,858.20 $300,000.00 $(26,250.00) $217,891.80 $161,977.50 $76,262.13 $141,573.57 3 $581,925.76 $111,772.50 $51,385.06 $300,000.00 $(27,562.50) $221,052.44 $160,665.00 $77,368.36 $134,681.70 4 $516,707.32 $111,772.50 $46,554.06 $300,000.00
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