Finance $50 - APA - 6 pages - 5 references
biscuit2016
galaxy_scenarios.xlsxWACC
| Weighted average cost of capital. | |||||
| Assumptions: | |||||
| Risk Free Interest rate: | 2% | ||||
| Expected return on market | 14% | ||||
| Market risk premium | 12% | ||||
| beta | 1.80 | ||||
| Tax rate | 28% | ||||
| Pre-tax cost of debt | 8% | ||||
| Equity raised | $ 60.00 | The percentages of debt and equity will remain the same whether Jeremy buys and builds in China or leases. This | |||
| Debt raised | $ 50.00 | assumption is based on the fact that he will still need working capital when going to China even if he leases. | |||
| Cost of Equity using CAPM | 23.6% | ||||
| After tax cost of debt | 5.76% | ||||
| WACC | 15.49% |
Lease
| Lease Scenario: | ||||||||||||||||||
| Assumptions: | ||||||||||||||||||
| Net Investment: | $ 50.00 | |||||||||||||||||
| Beginning FCF | $ 12.00 | |||||||||||||||||
| Lease Expense | $ 10.00 | |||||||||||||||||
| Growth in FCF | 15% | |||||||||||||||||
| Lease Expense increases | 6% | |||||||||||||||||
| Tax rate | 28% | |||||||||||||||||
| WACC | 15.50% | |||||||||||||||||
| This first scenario assumes a 15% increase in free cash flow each year, and a 6% increase in lease expenses because the problem states inflation in China is 6%. | ||||||||||||||||||
| Cash Flows: | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | ||
| Free Cash Flow | $ 12.00 | $ 13.80 | $ 15.87 | $ 18.25 | $ 20.99 | $ 24.14 | $ 27.76 | $ 31.92 | $ 36.71 | $ 42.21 | $ 48.55 | $ 55.83 | $ 64.20 | $ 73.83 | $ 84.91 | |||
| Lease expense, net of taxes | $ 7.20 islan_000: islan_000: Lease expenses are tax deductible, that is why the net lease expense is after-tax. | $ 7.63 | $ 8.09 | $ 8.58 | $ 9.09 | $ 9.64 | $ 10.21 | $ 10.83 | $ 11.48 | $ 12.16 | $ 12.89 | $ 13.67 | $ 14.49 | $ 15.36 | $ 16.28 | |||
| Net cash flow | $ (50.00) | $ 4.80 | $ 6.17 | $ 7.78 | $ 9.68 | $ 11.90 | $ 14.50 | $ 17.54 | $ 21.09 | $ 25.23 | $ 30.05 | $ 35.65 | $ 42.16 | $ 49.72 | $ 58.48 | $ 68.63 | ||
| NPV | $46.34 | |||||||||||||||||
| This scenario assumes no increase in FCF and lease expenses. | ||||||||||||||||||
| Cash Flows: | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | ||
| Free Cash Flow | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | |||
| Lease expense, net of taxes | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | $ 7.20 | |||
| Net cash flow | $ (50.00) | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | $ 4.80 | ||
| NPV | ($22.60) |
Buy
| Buy Assumptions: | |||||||||||||||||
| Net Investment: | $ 110.00 | ||||||||||||||||
| Beginning FCF | $ 12.00 | ||||||||||||||||
| Increases in FCF | 15.0% | ||||||||||||||||
| WACC | 15.5% | ||||||||||||||||
| The first scenario assumes an annual increase in FCF of 15%, as stated in the problem. | |||||||||||||||||
| There are no lease expenses or other expenses as FCF is after operating expenses. | |||||||||||||||||
| Years: | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | |
| Cash flows: | $ (110.00) | $ 12.00 | $ 13.80 | $ 15.87 | $ 18.25 | $ 20.99 | $ 24.14 | $ 27.76 | $ 31.92 | $ 36.71 | $ 42.21 | $ 48.55 | $ 55.83 | $ 64.20 | $ 73.83 | $ 84.91 | |
| NPV | $41.21 | ||||||||||||||||
| The second scenario assumes no increase in free cash flows: | |||||||||||||||||
| Years: | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | |
| Cash flows: | $ (110.00) | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | $ 12.00 | |
| NPV | ($41.50) |
Sheet4
1
2
3
4
5
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7
8
A
B
C
D
Buy Assumptions:
Net Investment:
110.00
$
Beginning FCF
12.00
$
Increases in FCF
15.0%
WACC
15.5%
