Question
Assume that several days ago, DLTR (the company you analyzed below) issued $75M worth of equity. At the same time, neither the company, nor the
Assume that several days ago, DLTR (the company you analyzed below) issued $75M worth of equity. At the same time, neither the company, nor the analysts expect DLTR to change its target D/V ratio. In addition, assume that right now, DLTR considers a new project (which will utilize primarily the core assets of DLTR). The projected project cash flows for DLTR:
Cost: $75 mil to be paid at T=0.
Project benefits: $6 mil/year for years 1,...,20
Should the company adopt or reject this project?
Hint: Your answer must be number-driven (i.e. not based on guesses, feelings). If you feel you need to know some required rate of return, then remember that DLTR is a company you analyzed below.
Calculated E
a. Shares Outstanding = $224.9M
b. Shares Trade = $98.85
c. Minority Interest = $0M
d. Deferred Income Tax = $1030.9M
= 224,900,000 * 98.85 + 0 + 1,030,900,000
= $23,262,265,000.00
Calculated D
a. Long-Term Debt = $3229.5M
= $3,229,500,000
Value of DLTR (V)
a. $23,262,265,000.00 + $3,229,500,000
= $26,491,765,000.00
Shareholders Own (E/V)
a. $23,262,265,000.00 / $26,491,765,000.00
= 87.81%
Debt-Holders Own (D/V)
a. $3,229,500,000 / $26,491,765,000.00
= 12.19%
Tax Rate (Given)
= 21%
WACC = E/V * Re + D/V * Rd * (1 - Tc)
= 87.81% * 5.61% + 12.19% * 2.19% * (1 - 21%)
= 5.14%
IN CHART FORM (FOR SIMPLER VIEW)
OLD DLTR | ||||
D/V | 12.19% | Re | 5.61% | |
E/V | 87.81% | Rd | 2.19% | |
Beta | 0.8 | WACC | 5.14% | |
Rf | 1.61% | |||
Def. Spread (AAA) | 0.58% | |||
MRP | 5% |
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