Corporate Finance: 1216758

Question No. 1

Calculation of Tax Rates
Amount in US Dollars
Particulars	2018	2019
(a) Income tax expenses	3,380	3,673
(b) Earnings before tax	15,242	16,996
Tax rate (a/b)	22.18%	21.61%
Calculation of OPAT
Amount in US Dollars
Particulars	2018	2019
Operating Income	19,007	21,125
Less: Tax expenses	4,216	4,565
Operating Profit After Tax (OPAT)	14,791.25	16,559.89
Calculation of Cost of Invested Capital
Amount in US Dollars
Particulars	2018	2019
(a) Invested Capital (assumed total assets)	251684	263414
(b) WACC	7%	7%
Cost of Invested Capital (a×b)	17617.88	18438.98
Calculation of EVA
Amount in US Dollars
Particulars	2018	2019
Operating Profit After Tax	14,791.25	16,559.89
Less: Cost of Invested Capital	17617.88	18438.98
Economic Value Added	(2,826.63)	(1,879.09)

Question no 2

2.1) this statement is false because company reduce their investment or increases their investment in business when the needs arise. The reduction on the investment amount is not a one-time effect.

2.2) as it can be seen that in 2019 the company has issue long term debt of $5479 while in 2018 the issued amount was $44781. So it can be rightly said that the given statement is incorrect

2.3) the statement is correct that the company has returned a maximum amount to their shareholders by repurchasing their common stock and also by paying huge amount of dividend.

Question no 3

Accounts payable is a short term obligation which has to be paid by the company to its suppliers or creditors. It is the sum of amounts which is owed to all the suppliers and vendors for the services and goods supplied by them. When the account payable of a business increases it means that the business is purchasing high quantity of goods from its vendors on credit and the amount will be paid by the firm on further period. Thus the amount of the goods which has been taken on credit is not blocked and can be utilized in some other essential purpose. (Footnote 1)

Question No. 4

Calculation of Net Present Value
Amount in dollars
Particulars	1	2	3	4
Operating profit before depreciation	500	500	500	500
Less: Depreciation	225	225	225	225
Operating profit after depreciation	275	275	275	275
Less: Tax @21%	58	58	58	58
Operating profit after tax	217	217	217	217
Add: Depreciation	225	225	225	225
Cash inflow after tax	442	442	442	442
Present value factor @8%	0.926	0.857	0.794	0.735
Present value of cash inflows	409.49	379.16	351.07	325.07
Present value of cash inflows (Total)	1,464.79
Less: Cost of machine after tax	711.00
Net Present Value	753.79

Question No. 5

Initial investment	35000
Cash inflow per annum	3000
Discounting rate	8%
Cash flow growth rate	3%
Calculation of Present Value of the Perpetuity
Particulars	Amount
(a) Cash inflow per annum	3000
(b) Divided by Discount rate minus Cash flow growth rate	5%
Discounting rate	8%
Cash flow growth rate	3%
Present Value of Perpetuity (a/b)	60000
Calculation of Net Present Value
Particulars	Amount
Present Value of Perpetuity	60000
Less: Initial Investment	35000
NPV	25000
Calculation of Rate of Return
Particulars	Amount
(a) Cash inflow per annum	3000
(b) Initial investment	35000
Rate of Return (a/b)	8.57%

Question No. 6

Particulars	Amount in millions of US dollars	Weights
Total Debt	111,989.00	38%
Market Value of equity	184,079.20	62%
Total Capital for WACC calculation	296,068.20	100%

Tax rate	21%
Cost of debt	4%
Cost of debt after tax [4(1-0.21)]	3.16%

Calculation of Market Return
Book value of common equity	82,726.00
Market capitalization	184,079.20
Market Return	101,353.20
Market Return in %	123%
Period in years (assumed as government bonds)	30
Average Market Return	4.08%

Calculation of Cost of Equity
Return from 30 Years Government Bond (Rf)	2%
Average Market Return (Rm)	4.08%
Market Risk Premium (Rm-Rf)	2.08%
Beta (β)	0.9
Cost of Equity [Rf + β(Rm-Rf)]	3.87%

Particulars	Cost (in %)	Weighted	Weighted Cost
Debt	3.16	38%	1.20
Equity	3.87	62%	2.40
Weighted Average Cost of Capital (in%)	3.60

Question No. 7

Calculation of NPV
Amount in million dollars
Year	Annual Profit		Discounting Factor @6%	Present Value of Cash Inflows
1	300	1.06	0.9434	283.02
2	300	1.1236	0.8900	267.00
3	300	1.19102	0.8396	251.89
4	300	1.26248	0.7921	237.63
5	300	1.33823	0.7473	224.18
6	300	1.41852	0.7050	211.49
7	300	1.50363	0.6651	199.52
8	300	1.59385	0.6274	188.22
9	300	1.68948	0.5919	177.57
10	325	1.79085	0.5584	181.48
Present value of cash inflows	2221.99
Less: Investment cost	1100.00
Less: Research and Development cost	40.00
Net Present Value	1081.99
Calculation of NPV
If after 3 years the research is successful then
Probability of Success = 5%
Particulars	Amount in million dollars
Present value of cash inflows	1,865.62
Less: Investment cost	1,100.00
Less: Research and Development cost	40.00
Net Present Value	725.62
Calculation of NPV
If after 3 years the research is unsuccessful then
Probability of failure = 95%
Particulars	Amount in million dollars
Present value of cash inflows	–
Less: Research and Development cost	40.00
Net Present Value	(40.00)
Calculation of Expected NPV
Particulars	Amount in million dollars
NPV of successful research (725.2×5%)	36.28
NPV of unsuccessful research (40×95%)	(38.00)
Expected NPV	(1.72)

Question no 8

There are many sources of financing but most often the company uses equity and debenture. The company can raise its capital by issuing debenture or by issuing equity. The CFO wants the company to issue equity shares and not to issue debenture because if the firm issue equity shares then there are certain benefits of issuing equity shares to the company such as the equity shareholders will not demand dividends whenever the organization declares dividend. At the time of liquidation equity shareholders will be paid after paying debenture holders, preferential creditors, and preference shareholders.

If the interest rate of debenture is high then the company should not issue debenture because the debenture holders will be paid interest at a higher rate which will create liability for the company and also at the time of winding up debenture holders are the one who will demand their redemption and interest amount before equity shareholders. Thus the CFO is correct that the company should use equity as a financing source rather than debenture. (Footnote 2)

Question no 9

When a company issue new shares the number of shares increases but the stock price of the shares remain constant. There is no relationship between issuing new shares the share price. But by issuing additional shares the ownership of the existing shareholders diluted or reduces. New shares can affect the existing shareholders shares value. So to increase the value of existing holders company often buyback their shares form the market.

Question no 10

There are many benefits of issuing bonds rather than taking bank loans such as while taking bank loans the end-use has to be mentioned but in case of bond no need to specify any end-use to the bondholders by the firm. Even if the bank interest rate of borrowing the loan amount is less but the company should prefer bonds because the bond interest rate is always less than the bank rate.

This difference interest rate can assist the organization in generating maximum profit. If a firm issue bond then large numbers of lenders can be attracted to the company. The benefit of flexibility can be achieved by issuing a wide variety of debt or bonds. Another advantage is that bond carries liquidity that is investors can sell their bonds anytime in the financial institutions, banks and also to other qualified buyers. Bank loans are considered to be illiquid. (Footnote 3)

Question no. 11

1. The US retailer can enter into forward contract to prevent the loss due to fluctuation in economy
2. Interest rate swap strategy should be used by the importer to hedge against the volatility of interest rate.
3. The manufacturing firm of US can apply the strategy of forward contracts, swaps, and options.
4. CFO can use the strategy of arbitrage so that he can earn profit when the price of steel decreases
5. The currency fluctuation can also be hedged by using currency swaps, options, and forward contracts. (Footnote 4)

Question no 12

1.  Acquisition price that will be paid by the acquirer to the target company will be the total enterprise value that is $ 293088.2.
2. If the acquisition deal is wholly paid on cash then the debt amount that the acquirer will have to take is $2875882 ($293088.2 subtracted by cash balance of $5500)

      c)  This deal can be financed by private equity enterprise by raising funds from issuing variety of debt so that the acquisition can be completed.

     d) Yes an LBO deal would be profitable in this case as all the funds will be raised by debt.

Question No. 13

Calculation of Premium (in pounds)
to be paid by Kraft
Particulars	Amount
Price offered by Kraft per share (in pound)	7.45
No. of shares outstanding (in millions)	1,370.00
Amount to be paid by Kraft to Cadbury (in million pounds) (A)	10,206.50
Price per share of Cadbury (in pounds)	5.71
No. of shares outstanding (in millions)	1,370.00
Market Value of Cadbury (in million pounds) (B)	7,822.70
Premium offered by Kraft (in million pounds) (A-B)	2,383.80
Calculation of Premium (in dollars)
to be paid by Kraft
Particulars	Amount
(a) Market Value of Cadbury (in million dollars)	12,830.00
(b) Market Value of Cadbury (in million pounds)	7,822.70
Exchange Rate per dollars (a/b)	1.64
(a) Premium offered by Kraft (in million pounds)	2,383.80
(b) Exchange Rate per dollars	1.64
Premium offered by Kraft (in million dollars) (a×b)	3,909.67
Calculation of Value of Synergy (in dollars)
estimated by the Analyst
Particulars	Amount
Annual cost savings	475.00
Less: Tax @30%	142.50
Annual cost savings after tax	332.50
Divided by Discount rate minus Growth rate (10%-2%)	8%
Present Value of Annual cost savings (A)	4,156.25
Integration cost	1,500.00
Present value factor @10% for 1 year	0.909
Present Value of Integration cost (B)	1,363.50
Value of Synergy (A-B)	2,792.75
Comparison of Premium paid by Kraft & Value of Synergy
Particulars	Amount
Premium offered by Kraft	3,909.67
Less: Value of Synergy	2,792.75
Extra Premium	1,116.92