Loan Payment Calculation And Refinancing Analysis For Casino.com Corporation

Monthly Payment Calculation

Present value of loan= 20,000,000

Number of periods = 10 years *12 month per year =120

Interest rate = 8%/12 =0.667%

Monthly payment = = $242,655.19

First monthly interest = 20,000,000* 0.667% = $133,333.33
First month principle= $242,655.19-$133,333.33 =$109,321.86
Total years for loan payment remaining after 36^thpayment = 10-3= 7years

Monthly payments remaining = 7 years * 12 =84

Monthly payment =$242,655.19

Principle remaining after three years,

PV = $15,568,577.62

Hence the principle amount remaining after 3 years will be $15,568,577.62.

For new loan present value will be $15,568,577.62, Number of periods will be 84 and interest rate will be 7%/12 =0.5833%

Monthly payment for new loan = = $234,971.55

Difference in monthly payments =$242,655.19-$234,971.55= $7,683.63

Present value of monthly payment’s difference

PV= $509,096.86

Cost of financing will be $250,000 hence net benefit from loan restructuring will be $259,096.86. Therefore it is advised to restructure loan.

Present value of loan= 20,000,000

Number of periods = 10 years *4month per year =40

Interest rate = 8%/4=2%

Monthly payment = = $731,114.96

Total years for loan payment remaining after 12^thpayment = 10-3= 7years

Quarterly payments remaining = 7 years * 4 =28

Quarterly payment =$731,114.96

Principle remaining after three years,

PV = $15,559,056

Future value of bond is 100 and present value of bond is 78.12, number of periods will be 10.

Interest rate of bond is 3.5% and future value of bond is 100, number of periods will be 9.

Return from bond = 73.37-78.12 = loss of $4.75

Coupon amount from the bond will be 2.5% of $1000 i.e. $25, number of periods will be 9, Interest rate of bond is 3.5% and future value of bond is 1000.

Hence loss percentage = (1000-923.92)/923.92 = 8.23%

Loss percentage in part 2 =4.75/73.37 = 6.08%

Price of MacDonald’s share now

Next dividend = $3.7

Growth rate= 5%

Market rate of return =11%

If company buys share today at $61.67 and received dividends the rate of return will be,

As per systematic risk is risk which occurred due to market in which company is operating, it does not arrive due to internal factors of the organization. This risk is a risk which cannot be eliminated by the organization because organization could not control on market forces. In the given events event A, C and E are systematic risk because these represent market risks which cannot be eliminated. On the other hand risk in event B and D are related to internal factors of the organizations hence represent unsystematic risk.

Year	Cash flows	Cumlative cashflows
0	$ (85,000.00)	$ (85,000.00)
1	$ 18,000.00	$ (67,000.00)
2	$ 22,500.00	$ (44,500.00)
3	$ 27,000.00	$ (17,500.00)
4	$ 31,500.00	$ 14,000.00
5	$ 36,000.00	$ 50,000.00

Payback period = =3+17500/31500 =3.556 years

Year	Cash flows	PV of cash flows @ 12%
0	$ (85,000.00)	$ (85,000.00)
1	$ 18,000.00	$ 16,071.43
2	$ 22,500.00	$ 17,936.86
3	$ 27,000.00	$ 19,218.07
4	$ 31,500.00	$ 20,018.82
5	$ 36,000.00	$ 20,427.37
Net present value	$ 8,672.54

Year	Cash flows	PV of cash flows @15.584%
0	$ (85,000.00)	$ (85,000.00)
1	$ 18,000.00	$ 15,573.09
2	$ 22,500.00	$ 16,841.74
3	$ 27,000.00	$ 17,485.20
4	$ 31,500.00	$ 17,648.98
5	$ 36,000.00	$ 17,450.74
Net present value	$ (0)

At interest rate 15.584% net present value is zero, it concludes that project have a internal rate of return at 15.584%.

As company is having positive net present value and internal rate of return more than required rate of return it is recommended to company to continue with the project. Every company make evaluation of investment projects because these projects require huge capital implementation and if project would not provide satisfactory income then company will face loss.

And 2.

Year	Renovate	Replace	PV of Renovate cash flows	PV of Replace cash flows
0	-$9,000,000.00	-$1,000,000.00	-$9,000,000.00	-$1,000,000.00
1	$ 3,500,000.00	$ 600,000.00	$ 3,043,478.26	$ 521,739.13
2	$ 3,000,000.00	$ 500,000.00	$ 2,268,431.00	$ 378,071.83
3	$ 3,000,000.00	$ 400,000.00	$ 1,972,548.70	$ 263,006.49
4	$ 2,800,000.00	$ 300,000.00	$ 1,600,909.09	$ 171,525.97
5	$ 2,500,000.00	$ 200,000.00	$ 1,242,941.84	$ 99,435.35
Net present value			$ 1,128,308.89	$ 433,778.78
Rank	1	2
Internal rate of return	20.49%	36.08%
Rank	2	1

The ranking of the project showing mixed singles due to difference in the cash flow patter under both options. The project which have lower amount of initial investment and payback earlier have higher internal rate of return. Hence in the present case internal rate of return under replace project is higher.

Answer 7

Year	Cash flows	Discounted cash flow @15%
0	$ (20,000.00)	$ (20,000.00)
1	$ 3,000.00	$ 2,608.70
2	$ 3,000.00	$ 2,268.43
3	$ 3,000.00	$ 1,972.55
4	$ 3,000.00	$ 1,715.26
5	$ 3,000.00	$ 1,491.53
6	$ 3,000.00	$ 1,296.98
7	$ 3,000.00	$ 1,127.81
8	$ 3,000.00	$ 980.71
9	$ 3,000.00	$ 852.79
Net present value	$ (5,685.25)

Year	Cash flows	Discounted cash flow @15%
0	$ (600,000.00)	$ (600,000.00)
1	$ 120,000.00	$ 104,347.83
2	$145,000.00	$ 109,640.83
3	$170,000.00	$ 111,777.76
4	$190,000.00	$ 108,633.12
5	$220,000.00	$ 109,378.88
6	$240,000.00	$ 103,758.62
Net present value	$ 47,537.04

Year	Cash flows	Discounted cash flow @15%
0	$ (150,000.00)	$ (150,000.00)
1	$ 18,000.00	$ 15,652.17
2	$ 17,000.00	$ 12,854.44
3	$ 16,000.00	$ 10,520.26
4	$ 15,000.00	$ 8,576.30
5	$ 15,000.00	$ 7,457.65
6	$ 14,000.00	$ 6,052.59
7	$ 13,000.00	$ 4,887.18
8	$ 12,000.00	$ 3,922.82
9	$ 11,000.00	$ 3,126.89
10	$ 10,000.00	$ 2,471.85
Net present value	$ (74,477.85)

Year	Cash flows	Discounted cash flow @15%
0	$ (760,000.00)	$ (760,000.00)
1	$ 185,000.00	$ 160,869.57
2	$ 185,000.00	$ 139,886.58
3	$ 185,000.00	$ 121,640.50
4	$ 185,000.00	$ 105,774.35
5	$ 185,000.00	$ 91,977.70
6	$ 185,000.00	$ 79,980.61
7	$ 185,000.00	$ 69,548.35
8	$ 185,000.00	$ 60,476.83
Net present value	$ 70,154.48

Year	Cash flows	Discounted cash flow @15%
0	$ (100,000.00)	$ (100,000.00)
1	$ –	$ –
2	$ –	$ –
3	$ –	$ –
4	$ 25,000.00	$ 14,293.83
5	$ 36,000.00	$ 17,898.36
6	$ –	$ –
7	$ 60,000.00	$ 22,556.22
8	$ 72,000.00	$ 23,536.93
9	$ 84,000.00	$ 23,878.04
Net present value	$ 2,163.39

In the present case NPV’s of project B, D and E are positive hence these are acceptable projects on the other hand projects A and C are unacceptable because these have negative NPV and in turn expected to destroy wealth of shareholders of the organization.

Payback period

Year	Cash flows	Cumulative cash flows
0	$ (1.50)	$ (1.50)
1	$ 0.30	$ (1.20)
2	$ 0.50	$ (0.70)
3	$ 0.50	$ (0.20)
4	$ 0.40	$ 0.20
5	$ 0.30	$ 0.50

Payback period = 3+.2/.4 =3.5 years

Year	Cash flows	Cumulative cash flows
0	$ (0.40)	$ (0.40)
1	$ 0.10	$ (0.30)
2	$ 0.20	$ (0.10)
3	$ 0.20	$ 0.10
4	$ 0.10	$ 0.20
5	$ (0.10)	$ 0.10

Payback period = 2+.1/.2 =2.5 years

Year	Cash flows	Cumulative cash flows
0	$ (7.50)	$ (7.50)
1	$ 2.00	$ (5.50)
2	$ 3.00	$ (2.50)
3	$ 2.00	$ (0.50)
4	$ 1.50	$ 1.00
5	$ 5.50	$ 6.50

Payback period = 3+.5/1.5 =3.33 years

If cut off payback is three years the company should accept only Beta project and if cutoff project is four years the company should accept all projects.
Project beta have shortest payback hence company should accept beta.
Discounted payback period

Year	Cash flows	Discounted cash flows	Cumulative cash flows
0	$ (1.50)	$ (1.50)	$ (1.50)
1	$ 0.30	$ 0.26	$ (1.24)
2	$ 0.50	$ 0.38	$ (0.86)
3	$ 0.50	$ 0.33	$ (0.53)
4	$ 0.40	$ 0.23	$ (0.30)
5	$ 0.30	$ 0.15	$ (0.15)

Discounted payback period is more than project’s life

Year	Cash flows	Discounted cash flows	Cumulative cash flows
0	$ (0.40)	$ (0.40)	$ (0.40)
1	$ 0.10	$ 0.09	$ (0.31)
2	$ 0.20	$ 0.15	$ (0.16)
3	$ 0.20	$ 0.13	$ (0.03)
4	$ 0.10	$ 0.06	$ 0.03
5	$ (0.10)	$ (0.05)	$ (0.02)

Discounted payback period= 3+ .03/.06 =3.5 years

Year	Cash flows	Discounted cash flows	Cumulative cash flows
0	$ (7.50)	$ (7.50)	$ (7.50)
1	$ 2.00	$ 1.74	$ (5.76)
2	$ 3.00	$ 2.27	$ (3.49)
3	$ 2.00	$ 1.32	$ (2.18)
4	$ 1.50	$ 0.86	$ (1.32)
5	$ 5.50	$ 2.73	$ 1.41

Discounted payback period= 4+ 1.32/2.73 =4.48 years

If cutoff for discounted payback period is 4 years the company should accept only beta project.

Project beta is having negative net present value hence it should be rejected however as this project is having lower initial investment hence its payback period become lower. Therefore beta project is only project which is acceptable under payback period method but unacceptable as per other capital budgeting techniques.
Project gamma is having highest net present value hence it should be accepted as per NPV technique however as this project is having higher initial investment hence its payback period become higher. Therefore gamma project is only project which is unacceptable under payback period method but acceptable as per other capital budgeting techniques.

Quick ratio: Liquidity of the organization
Cash ratio: Percentage of cash against the liabilities of the organization
Capital intensity ratio: Capital intensity of the organization
Total assets turnover: Efficiency of company in using assets of organization
Equity multiplier: Company’s long term capabilities to meet company’s financial leverage
Long term debt ratio: Percentage of Company’s assets in terms of loan term debts of the organization
Times interest earned: How efficiently company covered company’s debt obligations
Profit margin: How efficiently company earned profits on generated revenues from the operations
Return on assets: Profit earned by the company for each dollar of asset investment
Return on equity: Profit earned by the company for each dollar of shareholder’s investment
Price-earnings ratio: How much price can a investor pay for each dollar of earnings of the organization attributable to that investor

Calculation of required rate of return

Name of Company	Calculation	Required rate of return
Fire	4% + (12%-4%) * 0.85	10.8%
Water	4% + (12%-4%) * 1.25	14%
Air	4% + (12%-4%) * 1.6	16.8%

Required rate of return of portfolio

Company	Investment	Weight of investment	Required rate of return	Weighted return
Fire	$ 2.00	20%	10.80%	2.16%
Water	$ 3.00	30%	14%	4.20%
Air	$ 5.00	50%	16.80%	8.40%
Total	$ 10.00			14.76%

Required rate of return of portfolio= 14.76%

Required rate of return of portfolio

Name of Company	Beta	Weight of investment	Weighted Beta
Fire	0.85	20%	0.17
Water	1.25	30%	0.38
Air	1.60	50%	0.80
Beta of portfolio			1.35

Required rate of return of portfolio=4%+ (12%-4%) * 1.35= 14.8%

As per method 1

Company	Investment	Weight of investment	Required rate of return	Weighted return
Fire	$0	0%	10.80%	0.00%
Water	$4.00	40%	14%	5.60%
Air	$6.00	60%	16.80%	10.08%
Total	$10.00			15.68%

Method 2

Name of Company	Beta	Weight of investment	Weighted Beta
Water	1.25	40%	0.50
Air	1.60	60%	0.96
Total			1.46

Required rate of return of portfolio=4%+ (12%-4%) * 1.46= 15.68%

Due to above change beta o the portfolio will increase hence in turn risk associated with the portfolio is also increased.

References

Remer, D., & Nieto, A. (1995). A compendium and comparison of 25 project evaluation techniques. Part 1: Net present value and rate of return methods. International Journal of Production Economics , 42 (1), 79-96.

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