9.13. Financing Restrictions
A real investment alternative yields the following future cash flows
t
0
1
2
3
4
CF
t
–320,000
80,000
90,000
95,000
120,000
384
9 Taxation and Financing Decisions
The capital market interest rate isiD4% and the marginal tax rate isD20%.Depreciation isDtD80;000fortD1; : : : ; 4.(a) Determine the post-tax net present value if the investment is fully financed withequity.(b) Suppose, you are facing financing restrictions that force you to raise externalfunds to the amount of 90% of the acquisitions costs. A bank offers you twopossibilities(ba) A bullet loan with the following conditions:D6:5%,dD0%.(bb) A loan amortized by annual constant installments:D7:9%,dD0%.In case of (ba)(1) Determine the post-tax net present value of the bullet loan.(2) Determine the post-tax net present value of the real investment and thefinancing alternative in one financial plan.In case of (bb)(1) Determine the post-tax net present value of the loan. Which loan leads to ahigher post-tax net present value?(2) What happens if the borrowing rate for a short term liability (one period) isshortD18%?9.14. Prepayment PenaltySometimes, investors want to get rid of their existing liabilities as soon as possi-ble. They may find more profitable ways to acquire funds or are in a lucky positionto have enough cash to pay back debt. Assume the following future cash flows of areal investment opportunityt01234CFt–200,00090,00068,00055,00050,000Assume straight-line depreciation over 4 years. Suppose,iD6% andD40%.The cash flows after taxes are withdrawn at the end of each period.(a) Determine the post-tax future value of the equity financed real investment. Isthe investor advised to carry out the real investment?(b) Suppose, 60% of the acquisition costs have to be debt financed. You receive anoffer for a loan. The loan is amortized by constant annual installments (AtDA)with the following conditions:D12% anddD0%. Is the investor stilladvised to carry out the investment?(c) The investor is considering premature amortization of the loan. The prepaymentis assumed to be restricted intD2to2Aor intD3to2A. Thebank is willing to accept the prepayment under the following conditions: Ifprepayment intD2amounts to twice the annual installment, the bank willcharge a prepayment penalty ofe3,500; if prepayment intD3amounts to
