ESTIMATING THE WACC - 13 pt lecture note F454 SPRING 2013

Project debentures npv deb npv is shown in 30 suppose

Info icon This preview shows pages 24–25. Sign up to view the full content.

View Full Document Right Arrow Icon
Project Debenture’s NPV, Deb 0 NPV , is shown in (30). Suppose that the present value (using discount rate after tax,Deb WACC r - = 11.3%) of the forecasted Project Debenture free cash flow, Deb 0 V , and the estimated initial outlay for Project Debenture ( Deb 0 I ) are as indicated below. Deb 0 V = $60 million (31a) Deb 0 I = $40 million (31b) It follows that Deb 0 NPV equals: Deb 0 NPV = Deb 0 V - Deb 0 I = $60 million - $40 = $20 million (32) Project Debenture is acceptable because Deb 0 NPV > 0. Project Debenture is adopted if the choice is to accept or reject Project Debenture. If Project Debenture is being compared with a mutually exclusive alternative, the one with the higher positive NPV is adopted. 24
Image of page 24

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Estimating the WACC, page 25 of 25 S TEP 5. D ETERMINING THE F INANCING OF P ROJECT D EBENTURE S I NITIAL O UTLAY . The financing proportions in (28) (([ Deb 0 E / Deb 0 V ] and [ Deb 0 D / Deb 0 V ]) are target market value proportions established by the company for Project Debenture. Now we must determine Project Debenture’s initial outlay financing proportions ([ Deb,Debt 0 I / Deb 0 I ] and [ Deb,Equity 0 I / Deb 0 I ]). Since the market value of the additional debt issued to finance Project Debenture, Deb 0 D , equals the amount received by the company to fund the Project Debenture initial outlay, we know that: Deb,Debt 0 I = Deb 0 D (33) Noting that [ Deb 0 D / Deb 0 V ] = .25 (see (28)) and Deb 0 V = $60 million (see (31)), it follows that: Deb 0 D = Deb 0 Deb 0 D V Deb 0 V = .25 ($60 million) = $15 million (34) Combining (33) and (34), we have: Deb,Debt 0 I = $15 million (35) Using (29): Deb,Equity 0 I = Deb 0 I - Deb,Debt 0 I = $40 million - $15 million = $25 million (36) Therefore, given that Deb 0 V = $60 million and Deb 0 I = $40 million, in order to meet market value target [ Deb 0 D / Deb 0 V ] = .25, the funds to finance Project Debenture’s initial cost ( Deb 0 I = $40 million) must be from Deb,Debt 0 I = $15 million and Deb,Equity 0 I = $25 million . 2013(1) 25
Image of page 25
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern