= iREE THERERA2 .
Question 1: NPV Calculation (Advanced)
A project requires an initial investment of $1,000,000.
The project is expected to generate cash flows of
$300,000 in Year 1, $400,000 in Year 2, $500,000 in
Year 3, and $600,000 in Year 4. If the discount rate is
3
12%, calculate the NPV. R 12 % =
Answer:
The formula for NPV is:
1000 000
-1
,
>
0 000 , 000
-
year : ,
2 : 300 , 000 >
-
300
my
1112)
400 000 400
00011 12)"
: ,
2 >
- .
, 500 , 000 - 500. 000/ (1 123]
i
.
: 600 , 000 >
-
600 ,
000/21112st
+ 324 26438 ,
Question 2: IRR Calculation ASEBEME ENDU
OGStYiRE
=
A company is evaluating a project with cash flows of -
$500,000 (initial investment), $200,000 in Year 1, IPR
requiredon
$200,000 in Year 2, and $300,000 in Year 3. Determine
> accept
the IRR.
#E-h F
-
·
500 000
years
-
: ,
3
(1 + R) =
X
-
+3 0
5X + 2x +
=
2x
-
X
=
1 175
.
*
145 it
-
Soapay + 2000x2 + 200000X + So =0 R = 0. =
Pi#
Question 3: Cost of Equity (CAPM)
A company’s beta is 1.4, the risk-free rate is 3%, and the
market risk premium is 7%. Calculate the cost of equity
using the CAPM formula. B 1 4 = .
Pt 3%
DDPM
=
Rm-Ry =
7%
S
&ML(CAPM)
Re =
Pf +
&)Rm-Rf)
= 3% + 12477 %7 = 3 %
%+ 9 8 2
"284
Question 4: Cost of Equity (Gordon Growth Model)
A company’s next year’s dividend is projected at $4 per Di = 4
share. The dividend growth rate is 6%, and the current g = 6 %
stock price is $60. Calculate the cost of equity. Po =
60
DGM :
RE =
Polit +
g =+ = + 6 % =
6 .
65065 %
YTM + E14
BAY *
Question 5: WACC with Preferred Stock cost of Equity + cost
of debt
A firm has 50% equity (cost of equity: 12%), 30% debt
(pre-tax cost: 8%), and 20% preferred stock (cost: 10%).
The corporate tax rate is 21%. Calculate the WACC.
WACC =
LE](RE) + (P/) (RDS(l-ic) + (Y) (Rp) Fy 50 % 5 =
= 01
% 0 3
P
= .
= 30
10 . 5 x
12% ) +
[0 3
. x 8x (1 -
21% 7) + 10 . 2 x 10 % )
6% + 1 896 % +
.
2 % =
9 896 %
.
P/ = 20 %: 0 .
2
OCFE # Depreciation (iv) + (Sales-costs) (1-Tc)
Tax Shield Approach to OCF E
*
.
Question 6: Incremental Cash Flows and Tax Shield x 20
%
40000
A project requires $200,000 of new equipment,
depreciated straight-line over 5 years with no salvage For
value. Annual cash inflows are $75,000. The corporate 15000 x (80 )
%
tax rate is 20%. Calculate the total incremental cash
flows for Year 1. tYRM 000
200 , 000
new equipent
54F1 = 0
75000
cash inflows
20 %
fax
D #57PEBY
200
oz
= 40 , 000
5X135
& Tax Shield (ITEtHE)
Question 7: Break-Even EBIT
8000
A firm is comparing two structures: 40000 20 %
=
x
60000
③ RD AT 15000 x (1-20 % )
=
=
,
No debt (100% equity). & cash flow (Ecash flow + FH
60000 + 8000 68000
50% debt ($1,000,000 at 8%).
=
=
If EBIT is $250,000, calculate EPS for both structures
outstanding.6.
and find the break-even EBIT. Assume 100,000 shares
1 ,
% (0 08)
004 8000 ,
x YearO
.
22345
40000 40000 40000 40000
#ATTE 40000
- - -
5M
-
80000
-
flow +how +for
Shield +
800r +foo
too thos too +ho
how
Cash flow
+
EBIT =
Earning before Interest & Taxes
EEEPS-EBIT-
50 %
AGEX+*1450 %
Question 8: Dividend Reinvestment ARTI
A firm’s stock price is $50. It can either pay a $3
dividend or reinvest at a 15% return. Shareholders
require a 12% return. Which option adds more value?
3 x (1 + 15% ) =
3 45. . E
G# iP
=
AAA ROE =
GRABA
EBEFU
Question 9: Effect of Leverage on- (E)
LETE
ROE
A company’s equity is $2,000,000, and debt is
$1,000,000 at 10%. EBIT is $500,000. Tax rate is 25%.
Calculate ROE for both leveraged and unleveraged
scenarios. EBIT (1-25 % )
# 5 ROE =
2000000 13
=
%x
equity ,
A #55 =
ROE =
% )] (1-25% )
(EBIT-mx10
2008 , 000
=
%
1#
100000
95
40000040
.
000
= 300 ,
Question 10: Impact of WACC on Project NPV
A project has cash flows of $200,000 annually for 5
years and an initial investment of $700,000. Calculate the
NPV for WACC = 8% and WACC = 12%. yearo 700 000 :
-
,
1
70
: 200 , 000
t
2" 200 ,
000
:
200 or a
280 , 000
200 , 000
EPSiit
= I'GASE
ishares outstanding
ROET =Y
(175 ***BHB)
=
#7 A
equity
