Q1. A firm is evaluating a new investment and the financial projections are given below, from year 0 to year 4. The tax rate is 34%, all cash flows occur at the end of the year, and net working capital is recovered at the end of the project. Calculate the incremental free cash flow for every year.
|
Year
|
0
|
1
|
2
|
3
|
4
|
|
investment
|
16000
|
|
|
|
|
|
sales
|
|
8500
|
9000
|
9500
|
7000
|
|
operating cost
|
|
1800
|
2000
|
2200
|
1700
|
|
depreciation
|
|
4000
|
4000
|
4000
|
4000
|
|
investment NWC
|
200
|
250
|
300
|
200
|
RECOVERY OF nwc
|
Q2. Suppose that computer manufacturer ABC Inc. has five year bonds outstanding that trade in the market at $101.25 for every $100 face value. The bonds pay semiannual interest of 3% of face value. ABC also reported a return on equity of 14% last year, and expects it to be at this level for the next several years. The return on assets was 10%. Using market values, debt constitutes 40% of the overall value of ABC. The tax rate is 35%, beta is 1.25, the risk free rate is 5% and the market risk premium is 7%. Compute the cost of equity, the cost of debt and the WACC.