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b) Alpha Ltd has been in operation for the last 5 years and has been unprofitable, making a loss of $150,000 pa. A significant part
b) Alpha Ltd has been in operation for the last 5 years and has been unprofitable, making a loss of $150,000 pa. A significant part of this loss is due to annual depreciation of $100,000 pa on equipment and $200,000 in interest expense on a $2m loan. Although Alpha has kept up with the annual interest payment each year it has not met any principal payments. The management of Alpha believe that there is a 20% chance that a new product will receive approval from regulators in the near future, and if approved, will improve earnings by $5m pa and save the company from bankruptcy. Required: Using FCFF methodology, determine the value of equity for Alpha under the following set of assumptions and the amount of money that creditors (banks) are likely to lose. Tax rate is 30% (ignore any complications associated with tax, such as tax losses carried forward etc) Assume that no further investments in WClnv and FCInv are required and that no additional costs are associated with the new product Alpha has a beta of 1.8, the equity risk premium is 6% and Rf is 4% D/E ratio is 150%
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