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Finance: Capital Budget Process

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Data:

rd= 10%
T= 40%
FX1= 96.57 ¥
FX0= 95.72 ¥
Dps= 139.19 ¥ per share, selling at 1,000 ¥ per share; the underwriting cost is 7%, or 70 ¥
Pn= 930 ¥
Original Bond Yield: 12%
Risk Premium: 1.5%
rRF= 5%
RPM= 6.5%
bi= 1.75
RPW= 3.83%
biW= 1.44
n = 3 years
CF1= -300,425 ¥
CF2= -60,190 ¥
CF3= 210,515 ¥
Inventory Increases = 455,000 ¥
A/R Increases = 890,000 ¥
A/P & Current Liabilities Increases = 1,375,000 ¥
Net Operating Profits = 12,565,235 ¥
Net Fixed Assets = 11,730, 275 ¥
NOCF3= 70,165 ¥
g = 185%
S3= 90,175 ¥
Fixed Costs = 845,000 ¥
Variable Costs per Unit = 55 ¥
P = 110 ¥
BE = 10425 Units
Payback Period = 2.35 Years

Questions:
1.Calculate the After Tax Cost of Debt for a domestic-only company

2.Calculate the After Tax Cost of Debt for an internationally-based company with debt denominated in a foreign currency

3.Compare & Contrast the Cost of debt for a domestic-based with an international-based company. What do the numbers tell you about doing business internationally as opposed to domestically?

4.Calculate the Cost of Preferred Stock

5.Calculate the Cost of Equity using the Company Bond Yield, Risk Premium Approach, then calculate the Cost of Equity using the [domestic-only] CAPM, and then calculate the Cost of Equity using the Global CAPM

6.Contrasting & comparing the three values for the cost of equity should provide insight into the accuracy of forecasting & valuating the companyâ??s equity. What are those insights?

7.Calculate the Weighted Average Cost of Capital using both the domestic-only and then the international-based CAPM. (Use the little chart I made for you in the Capital Budget Process document. Itâ??s easier to organize the work this way.)

8.Calculate the NPV and IRR for this project.

9.Calculate the Net Operating Working Capital, Free Cash Flow, and salvage value for the project.

10.Calculate the break-even point for this project. Then, if the company were to set the break-even point, and wanted to know at what price they should set the commodity to achieve that break-even point, calculate the price at the company-set break-even point. If the industry average units per year manufactured is 5,000 units annually, is this an efficient operation? Why or why not?

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This solution provides a detailed, step by step calculation of the given finance problem.

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1. After tax cost of debt = rd*(1-T) = 10% * (1-0.4) = 10*0.6 = 6%
2. Cost of Foreign-Currency-Denominated Debt: rd (1-T)(1 +ΔFXe) + ΔFXe
ΔFXe = , = (96.57 - 95.72)/95.72 = .00888
Cost of Foreign-Currency-Denominated Debt = 6% * (1+.00888)+.00888 = 6.06216%
3. cost of debt for international market is higher than cost of debt for domestic market mainly due to the interest rate risk carried by international debt.
4. cost of preferred stock = D(ps)/P(n) = 139.19/930 = 0.1496 = 14.96%
5. cost of equity: company bond yield
Rs = original bond yield + risk premium = 12% + 1.5% = 13.5%
Cost of ...

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