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SEMESTER Fall 2016 Corporate Finance (FIN622) Assignment No. 1 Due Date: 28-November-2016 Marks: 10

Question:
ABC Company Limited estimates that it will need to replace existing production plant 8 years from now. The new production plant can be purchased for Rs.810,404 today. Studies for historical price changes of the production plant suggests to ABC Company’s management that the cost of production plant will rise by approximately 8% per year. The company has paid Rs.5 dividend per share last year and its earnings are expected to grow at the constant rate of 6% annually. There is an average continuous increasing trend of 2% annually in the historical share price of the company. The current market price of ABC Company’s share is Rs.55. The going market interest rate is 7% and is expected to grow at 1% annually. The company has been under the tax bracket of 30% since its inception. The company has following options available to purchase new production plant:
First option:
The company has cash surplus available. If the company sets aside today certain amount of funds from its retained earnings, it can earn 7% compounded annually on any sum it invests today.
Required: 4 marks
How much must be set aside today in order to generate enough funds to purchase the production plant in 8 years.
Second option:
Suppose that 8 years from now, the company has decided to acquire funds for the purchase of production plant by issuing equal amount of equity and debt.
Required: 6 marks
What will be the Weighted Average Cost of Capital (WACC) that company has to pay if it acquires required funds through debt and equity only.

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Option-2

WACC = (E/V × Re) + (D/V × Rd) × (1-T)
WACC=(750,000.623/1,500,001.246 × 15.6%) + (750,000.623/1,500,001.246 × 0.07) × (1-0.30)

Do calcultions by urself

formula main 1-tc ata hai ap ny bas 1-t likha howa hai c kiya ho ga

tc stands for corporate tax

tc ho ya t ho bat to 1 he hy...hona to tax e less hy 1 mn sy...so that doesn't matter

Assignment 1
Fin622
Corporate finance

Question:
ABC Company Limited estimates that it will need to replace existing production plant 8 years from now. The new production plant can be purchased for Rs.810, 404 today. Studies for historical price changes of the production plant suggest to ABC Company’s management that the cost of production plant will rise by approximately 8% per year. The company has paid Rs.5 dividend per share last year and its earnings are expected to grow at the constant rate of 6% annually. There is an average continuous increasing trend of 2% annually in the historical share price of the company. The current market price of ABC Company’s share is Rs.55. The going market interest rate is 7% and is expected to grow at 1% annually. The company has been under the tax bracket of 30% since its inception. The company has following options available to purchase new production plant:
First option:
The company has cash surplus available. If the company sets aside today certain amount of funds from its retained earnings, it can earn 7% compounded annually on any sum it invests today
Required:
How much must be set aside today in order to generate enough funds to purchase the production plant in 8 years.

Solution:
Price of new plant today = 810,404
Price of the plant after 8 years = 810,404 (810,404*0.08*8)
Price of new plant after 8 years=-RS=1329, 062.56
Now find the present value of the plant:
PV=FV*1/ (1+R) t
1329, 062.56/ (1.07)8
Present value of plant in RS=773,526.51

Second option:
Suppose that 8 years from now, the company has decided to acquire funds for the purchase of production plant by issuing equal amount of equity and debt.

Required:
What will be the Weighted Average Cost of Capital (WACC) that company has to pay if it acquires required funds through debt and equity only.
Solution:
WACC= (E/V*RE) + (D/V*RD)*1-t
Where:
E/V = percentage of the finance.
RE = RD = cost of equity.
T= corporate tax rate.
Cost of equity and debts =dividend per share/current market rate of stock+ growth rate of dividend 5/55+7 =7.26.
E/V= 12/484+72.6
EV =72.624793384297
WACC = (72.624793384294*7.26) + (72.624793384294*7.26) *1-0.3
Weighted average cost of capital that company has to pay with debts and equity = 3048.59419178995

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