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 investment of Rs. 200,000 in net working capital in first year. This investment in net working capital 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 installation 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 will begin operations immediately after the investment is made. ANF Inc. stock currently sells for Rs. 50 and company is expected to pay a dividend of Rs. 5 at the growth rate of 2% to its shareholders. 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 the 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 undertake? Support your answer 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.

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Other Important Instructions:

Please also read the following instructions carefully 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 uploaded 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

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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 students, internet, books, journals etc.

Note:

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