|
Particulars |
Value |
|
Rate |
0.30% |
|
Time |
360 |
|
Amount |
800,000 |
|
Monthly payment |
$3,637.16 |
|
Particulars |
Value |
|
Rate |
0.30% |
|
Time |
288 |
|
Amount |
800,000 |
|
Monthly payment |
$3,637.16 |
|
Loan outstanding after 24 years |
$235,208.19 |
|
Interest paid in 1st month of 25th year |
$705.62 |
|
Particulars |
Value |
|
Monthly payment |
$ 3,637.16 |
|
Time |
360 |
|
Amount |
$ 800,000.00 |
|
Total interest paid |
$ 509,378.61 |
From the evaluation, it can be detected that the total interest paid during the period of 30 years is approximately 60% of the total loan amount. In addition, the major limitation is the term of the loan, while the refinancing is also conducted a draw back.
|
Particulars |
Value |
|
Rate |
0.10% |
|
Time |
360 |
|
Monthly payment |
$3,637.16 |
|
Present Value |
$1,099,143.92 |
The major difference between the above solution is the difference in interest rate, which directly indicate that borrowing is much more benefits than to lend.
|
Particulars |
Good Inc |
Bad Inc |
|
Beta |
1.80 |
1.20 |
|
Market value of equity |
$ 10,000,000,000 |
$ 4,000,000,000 |
|
Market value of debt |
$ 20,000,000,000 |
$ 2,000,000,000 |
|
Total |
$ 30,000,000,000 |
$ 6,000,000,000 |
|
Face value of debt |
$ 22,000,000,000 |
$ 2,200,000,000 |
|
Years to debt maturity |
15 |
5 |
|
Annual coupon rate |
10% |
8% |
|
Risk free rate |
5% |
5% |
|
Return on Market |
15% |
15% |
|
cost of equity |
23.00% |
17.00% |
|
WACC |
13.00% |
13.47% |
The calculation is relevantly conducted in the above table, which depicts values of WACC for T. Holdings. The debt and equity combination of Bad Inc is supporting the current capital structure of T. Holdings. Hence, the WACC of 13.47% can be used for T. Holdings.
|
Particulars |
Bad Inc |
|
Beta |
1.20 |
|
Market value of equity |
$ 4,000,000,000 |
|
Market value of debt |
$ 2,000,000,000 |
|
Total |
$ 6,000,000,000 |
|
Face value of debt |
$ 2,200,000,000 |
|
Years to debt maturity |
5 |
|
Annual coupon rate |
8% |
|
Risk free rate |
5% |
|
Return on Market |
15% |
|
cost of equity |
17.00% |
|
WACC |
13.47% |
The discount rate of 13.47% can be used for the computation of the NV analysis for the projects proposed to T. Holdings.
|
Particulars |
1 |
2 |
3 |
4 |
5 |
|
Revenue |
$ 800,000,000 |
$ 960,000,000 |
$ 1,152,000,000 |
$ 1,382,400,000 |
$ 1,658,880,000 |
|
Variable cost |
$ 240,000,000 |
$ 288,000,000 |
$ 345,600,000 |
$ 414,720,000 |
$ 497,664,000 |
|
Fixed cost |
$ 80,000,000 |
$ 80,000,000 |
$ 80,000,000 |
$ 80,000,000 |
$ 80,000,000 |
|
Payments |
$ 2,000,000 |
$ 2,200,000 |
$ 2,420,000 |
$ 2,662,000 |
$ 2,928,200 |
|
Salvage |
$ 300,000,000 |
||||
|
Depreciation |
$ 120,000,000 |
$ 120,000,000 |
$ 120,000,000 |
$ 120,000,000 |
$ 120,000,000 |
|
EBIT |
$ 358,000,000 |
$ 469,800,000 |
$ 603,980,000 |
$ 765,018,000 |
$ 658,287,800 |
|
Tax |
$ 71,600,000 |
$ 93,960,000 |
$ 120,796,000 |
$ 153,003,600 |
$ 131,657,560 |
|
PAT |
$ 286,400,000 |
$ 375,840,000 |
$ 483,184,000 |
$ 612,014,400 |
$ 526,630,240 |
|
Cash flow |
$ 406,400,000 |
$ 495,840,000 |
$ 603,184,000 |
$ 732,014,400 |
$ 646,630,240 |
|
Particulars |
1 |
2 |
3 |
4 |
5 |
|
Net working capital |
$ 80,000,000 |
$ 96,000,000 |
$ 115,200,000 |
$ 138,240,000 |
$ 165,888,000 |
|
Net Change in working capital |
$ 16,000,000 |
$ 19,200,000 |
$ 23,040,000 |
$ 27,648,000 |
|
Particulars |
0 |
1 |
2 |
3 |
4 |
5 |
|
Cash Flow |
$ (680,000,000) |
$ 406,400,000 |
$ 479,840,000 |
$ 583,984,000 |
$ 708,974,400 |
$ 618,982,240 |
|
NPV |
$ 1,207,448,769.49 |
The calculation conducted in the above table directly indicates positive NPV values, which can allow T. Holding to improve its financial condition in future.
|
Particulars |
Value |
|
Earnings |
$ 28,000 |
|
Number of shares |
5,000 |
|
Dividend per share |
$ 5.60 |
|
Maureen shares @100 |
$ 560 |
|
Particulars |
Value |
|
150 Bonds @1000 |
$ 150,000 |
|
Market value per share |
$ 60 |
|
Number of shares repurchased |
2,500 |
|
Particulars |
Value |
|
Earnings Before Interest |
$ 28,000 |
|
$ 9,000 |
|
|
Earnings |
$ 19,000 |
|
Number of shares |
2,500 |
|
Dividend per share |
$ 7.60 |
|
Maureen shares @100 |
$ 380 |
|
Particulars |
Value |
|
Unlevered firm |
$ 560 |
|
Levered firm |
$ 380 |
|
Investing in Bonds |
$ 360 |
The new condition of Debt-free Inc will be problematic for the shareholders, as the debt-to-equity ratio is 1:1, which will reduce the shareholders’ value and raise debt payments.
|
Particulars |
Value |
|
Earnings |
$ 28,000 |
|
Tax |
$ 5,600 |
|
EAT |
$ 22,400 |
|
Number of shares |
5,000 |
|
Dividend per share |
$ 4.48 |
|
Maureen shares @100 |
$ 448 |
|
Particulars |
Value |
|
150 Bonds @1000 |
$ 150,000 |
|
Market value per share |
$ 60 |
|
Number of shares repurchased |
2,500 |
|
Particulars |
Value |
|
Earnings Before Interest |
$ 28,000 |
|
$ 9,000 |
|
|
Earnings |
$ 19,000 |
|
Tax |
$ 3,800 |
|
EAT |
$ 15,200 |
|
Number of shares |
2,500 |
|
Dividend per share |
$ 6.08 |
|
Maureen shares @100 |
$ 304 |
|
Particulars |
Value |
|
Unlevered firm |
$ 448 |
|
Levered firm |
$ 304 |
|
Investing in Bonds |
$ 360 |
The debt combination of the firm is problematic, as it will reduce shareholders values and increase debt payments.
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University Press.
DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics, 116(2), pp.219-236.
Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies, 27(1), pp.153-179.
Zeitun, R. and Tian, G., 2014. Capital structure and corporate performance: evidence from Jordan.
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