Santiago Project $7,392,000.00 $575,000.00 $255,000.00 t-0 Cost of Capital & Capital Structure Worksheet D/E DVA (W) 0.00 0.30 0.50 rd(1-T) 0.00% 315% 3.47% Investment in Inventory Accounts Payable b EIA (Wce) 1.18 1.000 141 0.769 WACC 8.252% 7.836% 7.757% 0.000 0.231 0.00% 4.77% 5.25% 6.75% 8.25% 9.24% 9.90% increase Term years Depreciated using MACRS,half year convention Class Life Marginal (federal+state) tax rate Salvage Value Production Cost Forecasts Fixed Costs Annuel Variable Costs year 0.429 1.76 0.571 34% $283,000.00 Where: rd before tax cost of debt rd(1-T)-aftertaxcostofdebt b beta re- cost of common equity Wd-Weight of debt Wce-Weight of common equity end of 9 years 200,000 45% per year of revenue Firms Beta Risk Free Rate of Return Market Risk Premium 1.41 3.25% 4.25% Levels of Debt and Common Equity (market values) Debt Equ $250,000,000.00 $833,333,333.00 $1,083,333,333.00 Total Capital Year Depreciation (% of depreciable basis 20.00% 32M% 19.20% 1 1.52% 11 .52% 5.76% 2 4 2 Estimated Sales in Year 1 Estimated Sales in Year 2 4 Estimated Sales in Year 3 Estimated Sales in Year 4 6 Estimated Sales in Year 5 7 Estimated Sales in Year 6 Estimated Sales in Year 7 $1,750,000.00 $2,187,500.00 $2,187,500.00 $2,012,500.00 $2,012,500.00 $1,925,000.00 $1,837,500.00 25% 25% 15% 15% 10% 5% Risk Level Class Low Risk Below Average Rislk Normal Risk Above Average Risk High Risk Hurdle Rate WACC-2 WACC-1 Equal to the WACC WACC+1 WACC+2 7 The Project is considered to be High Risk 1. What is the firm's current Weighted Average Cost of Capital (WACC) at its current capital structure 2. Capital Structure theory addresses finding a firm's optimal capital structure. How do you determine the optimal capital structure? 91. What is the firm's current Weighted Average Cost of Capital (WACC) at its current capital structure. 0 2. Capital Structure theory addresses finding a firm's optimal capital structure. How do you determine the optimal capital structure? 3. What is the SOCP's optimal capital structure? (Complete the Cost of Capital & Capital Structure worksheet) 4 4. Define Hurdle rate. Based on SOCP's current capital structure, what is the appropriate Hurdle Rate for the Cuba project? 8 Please complete the capital budgeting analysis for this project. You should develop the incremental cash flows: 9 5. Initial investment cash flow at t-0 0 6. Operating cash fows through the life of the project 7. Terminal cash flows 1 You should evaluate the project using: 48. Net Present Value 5 9. Internal Rate of Return 6 10. Modified Internal Rate of Return 911. Present your decision whether the project should be accepted or rejected, and justify Santiago Project $7,392,000.00 $575,000.00 $255,000.00 t-0 Cost of Capital & Capital Structure Worksheet D/E DVA (W) 0.00 0.30 0.50 rd(1-T) 0.00% 315% 3.47% Investment in Inventory Accounts Payable b EIA (Wce) 1.18 1.000 141 0.769 WACC 8.252% 7.836% 7.757% 0.000 0.231 0.00% 4.77% 5.25% 6.75% 8.25% 9.24% 9.90% increase Term years Depreciated using MACRS,half year convention Class Life Marginal (federal+state) tax rate Salvage Value Production Cost Forecasts Fixed Costs Annuel Variable Costs year 0.429 1.76 0.571 34% $283,000.00 Where: rd before tax cost of debt rd(1-T)-aftertaxcostofdebt b beta re- cost of common equity Wd-Weight of debt Wce-Weight of common equity end of 9 years 200,000 45% per year of revenue Firms Beta Risk Free Rate of Return Market Risk Premium 1.41 3.25% 4.25% Levels of Debt and Common Equity (market values) Debt Equ $250,000,000.00 $833,333,333.00 $1,083,333,333.00 Total Capital Year Depreciation (% of depreciable basis 20.00% 32M% 19.20% 1 1.52% 11 .52% 5.76% 2 4 2 Estimated Sales in Year 1 Estimated Sales in Year 2 4 Estimated Sales in Year 3 Estimated Sales in Year 4 6 Estimated Sales in Year 5 7 Estimated Sales in Year 6 Estimated Sales in Year 7 $1,750,000.00 $2,187,500.00 $2,187,500.00 $2,012,500.00 $2,012,500.00 $1,925,000.00 $1,837,500.00 25% 25% 15% 15% 10% 5% Risk Level Class Low Risk Below Average Rislk Normal Risk Above Average Risk High Risk Hurdle Rate WACC-2 WACC-1 Equal to the WACC WACC+1 WACC+2 7 The Project is considered to be High Risk 1. What is the firm's current Weighted Average Cost of Capital (WACC) at its current capital structure 2. Capital Structure theory addresses finding a firm's optimal capital structure. How do you determine the optimal capital structure? 91. What is the firm's current Weighted Average Cost of Capital (WACC) at its current capital structure. 0 2. Capital Structure theory addresses finding a firm's optimal capital structure. How do you determine the optimal capital structure? 3. What is the SOCP's optimal capital structure? (Complete the Cost of Capital & Capital Structure worksheet) 4 4. Define Hurdle rate. Based on SOCP's current capital structure, what is the appropriate Hurdle Rate for the Cuba project? 8 Please complete the capital budgeting analysis for this project. You should develop the incremental cash flows: 9 5. Initial investment cash flow at t-0 0 6. Operating cash fows through the life of the project 7. Terminal cash flows 1 You should evaluate the project using: 48. Net Present Value 5 9. Internal Rate of Return 6 10. Modified Internal Rate of Return 911. Present your decision whether the project should be accepted or rejected, and justify