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The following information relates to questions 4 to 1 0 : Basically i want the correct answers and formulas to learn from it thanks. I
The following information relates to questions to : Basically i want the correct answers and formulas to learn from it thanks. I want the answers pls final results of each question
Sugar Baby Corp. SBC is considering whether to build a refinery in the US state of Georgia
to serve its North American market. SBC is based in the UK and processes raw sugar into
premium gourmet sugar. Currently, SBC exports kg of sugar per year to its North
American customers and realizes a contribution margin of GBP per kg sold. SBC is certain
that the new refinery in the US would meet all the current demand in North America and sales
volume would likely increase. SBC does not foresee it will be able to sell any of the amount
currently exported to North America once the new refinery is operational.
SBC estimates that it could sell kg of sugar in North America during the first year of
operations, and sales volume would grow at annually. SBC plans to price its product at
USD per kg Total operating costs are expected to be USD per kg Both the sales
price and operating costs are expected to keep pace with the US inflation rate forecast of
per annum for the next years. The UK inflation rate is estimated at per annum for the
next years. The current USDGBP spot rate is SBC believes that Relative PPP is the
best predictor of future exchange rates.
The expected initial cost of the refinery is USD million. SBC plans to finance this amount
by a combination of debt and equity capital. The refinery will increase SBCs borrowing
capacity by GBP million, and it plans to borrow only that amount. The State of Georgia will
provide a concessionary loan of USD million for a period of years at an interest rate of
Principal on the loan will be repaid in equal installments over the life of the loan. At
this point, SBC is uncertain whether to raise the remaining debt it requires through a domestic
bond issue at or a Eurodollar bond issue at SBCs allequity cost of capital is
The US Internal Revenue Service will allow SBC to depreciate the new refinery over a year
period on a straightline basis. After that, the refinery equipment is expected to have substantial
market value. The UK and the US have the same corporate tax rate of There are no
restricted funds available for SBC to offset the cost of the initial investment. SBC prefers to
use Lessards APV model for capital budgeting analysis.
Compute the present value of aftertax incremental operating cash flows OCF in GBP
marks
Compute the present value of the depreciation tax shields. Why are depreciation tax shields
discounted at the domestic cost of debt? marks
Compute the present value of the benefit from the concessionary loan in GBP marks
Using the Fisher Effect, explain whether SBC should borrow the remaining GBP million
through a domestic ie UK bond issue or a Eurodollar bond issue. marks
With the bond you selected in question compute the present value of the interest tax
shields in GBP marks
Compute the present value of the interest tax shields from the concessionary loan in GBP
marks
What is the APV of the proposed project in GBP ignoring terminal value? marks
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