The project under consideration entails an ititial infrastructural invtment of rm million. and subsequent investments of the same amount every ve years. These aets will be depreciated on a straight-line basis to a book value of zero ve years from the purchase. but can be salvaged for approximately half the original investment amount. Revenue for the next year is projected to be $30!} million. and is expected to grotv at an annual rate of2'l'. for four years {i.e.. years 2 through 5]. after which revenues are expected to remain at that level indenitely. Annual variable costs and year-end net working capial aociated tv'lh the project are estimated to be 3t}??- and [(1% of annual revenue respectively. and xed costs are estimated to be t} million per year. Neither the debt nor equity ofT. Holdings is traded. but 5. Corp reckons they are worth $3 billion and $15 billion rapectively. In the immediate future. T. Holdings intends to recapitalize by iuing equity to repay all of their outstanding debt. In addition. 5. Corp looked into Good Inc. and Bad Inc.the former is a conglomerate with businesses such as global telecommunications. food and beverage. and nancial services. whereas the latter is a pure-play tvltich focttses on developing their telecommunications busine in the Asia- Pacic. Also. 5. Corp provides the following information on these entiti: Militias. Beta Lit} l.2l'.lI Market value of equity $ III} billion $4 billion Market value of debt $2!!!I billion $2 billion Face value of debt $22 billion $2.2 billion Years to debt maturity l5 5 Annual coupon rate III}??- 3% The prevailing corporate marginal tax rate is 2%. the expected return on the market portfolio is [5%. and the risk-free rate is 5%. Assume the ntfs cost ofdebt does not vary with capital structure and nancial distress is costlm. (El (ii (iii (hi {i} {ii} [iii] {it-'1 Calculate and justify a suitable weighted average cost of capital based on T. Holdings* existing capital structure. {3 marks] Justify and calculate a suitable discount rate for the telecommunications trait-- {ti marks] Compute operating cadt flows ar the rst ve years. {lmarks} Compute changes in net working capital for the rst ve years. {4 marks] Compute l'wlP'itIIr based on cadt otv from aets for the rst ve years. {4 marks] Should T. Holdings accept the telecommunications project"!I {3 marks] Question 2 {all} marks) T. Holdings, an Asia-Pan: ic teleoommunieations company. has excess capital and is looking to make a regional telecommunications investment. S. Corp won the eonnaet to advise 1'. Ho ld'lt g on the potential of the investment, and allows T. Holding to pay for its charges in annual installments. starting at $2 million for the next yea. and increasing at 10% annually until the nal installment in the fth year
