5. You're the CFO of Pathao Foods. The company has 210,000 shares outstanding which are currently trading in market for BDT 36. The company's past dividend payments are given below: 2015 2016 2017 2018 2019 2020 BDT 5 BDT 5.3 BDT 5.8 BDT 6.2 BDT 6.5 BDT 6.5 Pathao Food also has 6,000 bonds outstanding. The bonds carry a 7 % coupon, pay coupon annually, and matures in 10 years. The bonds are selling at 95% of face value. Pathao Food is evaluating a project to buy 5 freezing vans to expand it's existing food delivery business. This project would enable the company to generate yearly revenue of BDT 10 million and incur yearly operating cost of BDT 6 million. The project will have 5 years life and would require an investment of BDT 1.5 million for each freezing van. The total registration cost of the freezing vans would be BDT 500,000. These vans will be depreciated using 3 years MACRS and can be scraped for BDT 1 million after the useful life is over. The average tax rate is 35%. Required: Evaluate the project's feasibility using discounted payback period, net present value and internal rate of return decision rules and decide to accept/reject the project. Note: Pathao Foods want to recovers its initial investment within 3 years with nominal cash flows and in 3.5 years with real value of cash flows. (30) Part B Short Questions (Maximum 120 words for each answer) Total Points 10 Describe the use of financial leverage on firm's value (proposition 1) and firm's cost of capital (proposition 2) in light of Modigliani and Miller theory under the following assumptions a) In the absence of corporate taxes and bankruptcy cost. What would be the optimal capital structure in this case? Explain with equations and figures. (5) b) In the presence of corporate taxes and bankruptcy cost, what might be the extra benefit/loss firm incorporates? What would be the optimal capital structure in this case? Explain with equations and figures. (5) 5. You're the CFO of Pathao Foods. The company has 210,000 shares outstanding which are currently trading in market for BDT 36. The company's past dividend payments are given below: 2015 2016 2017 2018 2019 2020 BDT 5 BDT 5.3 BDT 5.8 BDT 6.2 BDT 6.5 BDT 6.5 Pathao Food also has 6,000 bonds outstanding. The bonds carry a 7 % coupon, pay coupon annually, and matures in 10 years. The bonds are selling at 95% of face value. Pathao Food is evaluating a project to buy 5 freezing vans to expand it's existing food delivery business. This project would enable the company to generate yearly revenue of BDT 10 million and incur yearly operating cost of BDT 6 million. The project will have 5 years life and would require an investment of BDT 1.5 million for each freezing van. The total registration cost of the freezing vans would be BDT 500,000. These vans will be depreciated using 3 years MACRS and can be scraped for BDT 1 million after the useful life is over. The average tax rate is 35%. Required: Evaluate the project's feasibility using discounted payback period, net present value and internal rate of return decision rules and decide to accept/reject the project. Note: Pathao Foods want to recovers its initial investment within 3 years with nominal cash flows and in 3.5 years with real value of cash flows. (30) Part B Short Questions (Maximum 120 words for each answer) Total Points 10 Describe the use of financial leverage on firm's value (proposition 1) and firm's cost of capital (proposition 2) in light of Modigliani and Miller theory under the following assumptions a) In the absence of corporate taxes and bankruptcy cost. What would be the optimal capital structure in this case? Explain with equations and figures. (5) b) In the presence of corporate taxes and bankruptcy cost, what might be the extra benefit/loss firm incorporates? What would be the optimal capital structure in this case? Explain with equations and figures
