Find the present value of the net cash flows
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You are given the following net cash flows:
Year Net Cash Flow
______ ______________
0 $ 0
1 $ 1
2 $ 2,000
3 $ 2,000
4 $ 2,000
5 $ 0
6 ($ 2,000) Negative number
The firm's debt to equity ratio is 60% and the firm has $600,000 in debt. The cost of debt is 10% on the first $450,000 of debt and 18% on the remaining debt. Cost of equity is 14.88% and the tax rate is 40%.
Given the information present above, please find the present value of the net cash flows.
W-A-C-C = WdKd(1-t) + WpsKps + WcsKcs (see below for calculations)
.6(.12)(1-.4) + 0 + .4(.1488)
4.32 + 0 + 5.95
10.27 Required rate of return
Debt = 40%
Equity = 60%
Debt = $600,000 -> $450,000 * 10% = $45,000
$150,000 * 18% = $27,000
Total = $72,000
Cost of Debt $72,000 / $600,000 = 12%
Cost of Equity = 14.88%
NPV = NCF0 + NCF1 + NCF2 .... NCF6
_____ _____ _____
(1+r)^1 (1+r)^2 (1+r)6
= $0 + $1 + $2,000 + $2,000 + $2,000 + $0 + ($2,000)
______ ________ ________ ________ ______ _________
(1.1027) (1.1027)^2 (1.1027)^3 (1.1027)^4 (1.1027)^5(1.1027)^6
= $0 + $.90 + $1,644.80 + $1,491.61 + $1,352.70 + $0 + ($1,112.46)
NPV = $3,377.55 Answer?
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Solution Summary
The expert finds the present value of the net cash flows. 18% remaining debt is analyzed. You will find the answer to this puzzling assignment inside...
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Hello!
You made a small mistake in the WACC calculation. Notice that you're given the debt/equity ratio (D/E), while the WACC calculation uses the D/(D+E) and E/(D+E) weights. So the appropriate weights to use in the WACC formula are not 0.6 ...
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