FIN622 Corporate Finance Assignment No.1 Solution Spring Semester 2013

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FIN622 Corporate Finance Assignment No.1 Solution Spring Semester 2013



SEMESTER SPRING 2013
Corporate Finance (FIN722)
Assignment No. 1
Due Date: 06-May-2013
Marks: 15
Assignment:
Topic: Calculation of WACC and Capital Budgeting Analysis
ANF Inc., a garment manufacturer, is planning
to install a new plant at a cost of Rs.
1,500,000. It also requires an initial investme
nt of Rs. 200,000 in net working capital in
first year. This investment in net working cap
ital will be recovered at
the end of useful
life of plant. Plant’s expected
economic life is 5 year. At
the end of that period, its
salvage value is estimated to be Rs. 150,000.
Expected pre-tax cash inflows by installati
on of new plant are: Rs. 500,000 in year1,
Rs. 600,000 in year2, Rs. 700,000 in year3, Rs. 750,000 in year4 and Rs. 800,000 in
year5. ANF Inc. uses straight line method of
depreciation for plant and its tax rate is
30%. For capital budgeting purposes, company’s
policy is to assume that the cash flows
occur at the end of year. The plant w
ill begin operations immediately after the
investment is made.
ANF Inc. stock currently sells for Rs. 50 a
nd company is expected to pay a dividend o
f
Rs. 5 at the growth rate of 2% to its sharehol
ders. ANF Inc. target debt to equity ratio is
40:60 and it’s before tax cost of debt is
10% and the company’s tax rate is 30%.
Requirements:
Based upon above given information, being th
e student of finance, you are required to
1)
Calculate the Cost of Equity. (2 marks)
2)
Calculate the Weighted Average
Cost of Capital. (2 marks)
3)
Calculate NPV of the project. (5 marks)
4)
Calculate IRR by
using interpolation formula.
(5 marks)
5)
Whether the project is feasible to undert
ake? Support your an
swer with logical
reason(s). (1 mark)
Important Instructions:
Please read the following instructions carefully
before preparing the assignment solution:

Detailed working
of each requirement is
necessary to provide.

Round off
you values maximum up to two (2) decimal points.

Watch the relevant video lectures
and also
consult the recommended book
(s) that will surely help
you out in making clear the concepts.

Along with video lectures and recommended book(s),
additional material has also been provided
on VULMS in different lessons
. You can
view these supplements on VULMS under the tab of
“lessons” along with PPTs
.
Other Important Instructions:
Please also read the following instructions care
fully before attempting the assignment solution.
Deadline:

Make sure that you upload the solution file before the due date.
No assignment will be accepted
through e-mail after due date
once the solution has been upl
oaded by the instructor.
Formatting guidelines:

Use the font style “Times New Roman
or Arial” and font size “12”.

It is advised to compose your document in
MS-Word
.

Use
black
and
blue
font colors only.
Rules for Marking
Please note that your assignment
will not be graded
or
graded as Zero (0)
if:

It has been
submitted after due date

The
file you uploaded does not open or is corrupt

It is in any format other than
doc (MS. Word)

It is
cheated or copied from other stud
ents, internet, books, journals etc
.
Note:
Only in the case of Assignment,
24 hours extra / grace period
after the due date is
usually available to overcome
uploading difficulties which ma
y be faced by the students
on last date. This extra time should only be
used to meet the emergencies and above
mentioned due dates should al
ways be treated as final to avoid any inconvenience.

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Idea Solution :

Yield to Maturity (YTM) for a bond is the total return, interest plus capital gain, obtained from a bond held to maturity. Yield to maturity is a useful measure of the attractiveness of a seasoned bond that is held to maturity and redeemed at par value. For example, suppose you buy a $1000 par value ABC Company bond with a 5% coupon rate maturing in five years, and the market price for the bond is $900. The coupon rate is the annual interest rate payable on the $1000 par value, which is $50 per year. The current yield of the bond is the interest divided

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Definition
The term Yield to Maturity also called as Redemption Yield often abbreviated as YTM and used when it comes to bond funds, is defined as the rate of return obtained by buying a bond at the current market price and holding it to maturity. Yield to Maturity is the index for measuring the attractiveness of bonds. When the price of the bond is low the yield is high and vice versa.

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