Q3
c. The project is expected to have revenues of S 15 million each year for the next 10 years and the non-cash working capital is expected to be 10% of the revenues over the entire period, with the investment in working capital being made at the beginning of each year. This investment will be fully salvaged in year 10 The tax rate is 40%. a. Given the estimates of net present value and assumption of no salvage, what was the analyst's estimate of annual after-tax cash flow on the project? (2 points) b. What is the correct net present value for the project? (Make the necessary corrections to the cashflows and discount rates for the three errors noted on the last page) (4 points) production company. At the end of its most recent 3. Salvatore Inc. is a motion picture financial year, the firm had $ 500 million in interest bearing debt on its books (with interest payments of s 35 million a year and an average maturity of 8 years). The firm has a rating of B+ and a pre-tax cost of debt of 8%. There are 50 million shares trading at $ 6 per share and the levered beta for the firm is 2.25. The tax rate is 40%, the riskfree rate is 4% and the market risk premiumn is 4.82%. a. Estimate the current cost of capital for the firm. (2 points) b. Assume now that Salvatore Inc. is able to issue enough stock to retire half of i outstanding debt (in market value terms). If the stock price does not change after transaction, estimate the pre-tax cost of debt after the transaction. (4 noints c. The project is expected to have revenues of S 15 million each year for the next 10 years and the non-cash working capital is expected to be 10% of the revenues over the entire period, with the investment in working capital being made at the beginning of each year. This investment will be fully salvaged in year 10 The tax rate is 40%. a. Given the estimates of net present value and assumption of no salvage, what was the analyst's estimate of annual after-tax cash flow on the project? (2 points) b. What is the correct net present value for the project? (Make the necessary corrections to the cashflows and discount rates for the three errors noted on the last page) (4 points) production company. At the end of its most recent 3. Salvatore Inc. is a motion picture financial year, the firm had $ 500 million in interest bearing debt on its books (with interest payments of s 35 million a year and an average maturity of 8 years). The firm has a rating of B+ and a pre-tax cost of debt of 8%. There are 50 million shares trading at $ 6 per share and the levered beta for the firm is 2.25. The tax rate is 40%, the riskfree rate is 4% and the market risk premiumn is 4.82%. a. Estimate the current cost of capital for the firm. (2 points) b. Assume now that Salvatore Inc. is able to issue enough stock to retire half of i outstanding debt (in market value terms). If the stock price does not change after transaction, estimate the pre-tax cost of debt after the transaction. (4 noints
