408 Group Project 2 - Prof Solution

408 Group Project 2 - Prof Solution - R(e*Equity...

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INFO Debt % 30.0% $300M in debt at BV (only thing given) Equity % 70.0% $20/share *35M shares = $700M R(d) 5.0% Triple BBB rate for 30 year; 10 year would be ~4.0% R(f) 3.0% Current 30 year treasury; using 10 year would be ok, ~2% Beta 1.2 given R(p) 8.5% from text; lots of sources detailing 4-9% Year 0 1 2 3 4 5 TV Tax Rate 35.0% Cash Flow (100,000) (20,000) (10,000) 5,000 15,000 268,326 248,326 NPV at original WACC (calc) 52512 (100,000) (18,146) (8,232) 3,735 10,165 164,991 NPV at original WACC (formula) 52512 Year 0 1 2 3 4 5 TV 1. Calculate Original WACC Cash Flow (100,000) (20,000) (10,000) 5,000 15,000 193,277 173,277 NPV at new WACC (calc) -11570 (100,000) (17,579) (7,725) 3,395 8,952 101,387 R(e) = 13.20% R(f) + Beta * R(p) NPV at new WACC (formula) -11570 WACC = 10.22%
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Unformatted text preview: R(e)*Equity% + R(d)*Debt % * (1-tax rate) At the original WACC, the new product is a positive NPV (on a perpetuity basis) 2. Calculate Pure Play Asset Beta However, when adjusting for appropriate asset beta from the pure play, and then relevering, it's a negative NPV PP Equity Beta (Be) 1.5 PP EQ% 90% PP Debt% 10% PP Tax Rate 40% Asset Beta (Ba)= 1.40625 B(e) / (1+ ((D/E)*(1-tax))) 3. Relever Asset Beta for Exisiting Capital Structure Asset Beta (Ba)= 1.40625 PP EQ% 70% PP Debt% 30% PP Tax Rate 35% Equity Beta (Be) 1.797991 4. Calculate New R(e) & new WACC R(e) = 18.28% R(f) + Beta * R(p) WACC = 13.77% R(e)*Equity% + R(d)*Debt % * (1-tax rate)...
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