Year Cash Flow

0 -$315,000
1 $132,000
2 $118,000
3 $96,000
4 $85,000

Required R 14%

NPV $6,710.73

IRR 15.12%

Profitabilit 1.02

Payback Pe 2.68
Year Cash Flow Intial Cost + FCF
0 -$315,000 -$315,000
1 $132,000 -$183,000
2 $118,000 -$65,000
3 $96,000 $31,000
4 $85,000 $116,000

Discounted 3.87
Year Cash Flow PV of CF Initial Cost + PV(FCF)
0 -$315,000 -$315,000 -$315,000
1 $132,000 $115,789 -$199,211
2 $118,000 $90,797 -$108,413
3 $96,000 $64,797 -$43,616
4 $85,000 $50,327 $6,711
Initial $ 205,000
Recovery Depreciat Book
4-Year
Year ion Value
0 $ 205,000
1 33.33 $ 68,327 $ 136,674
2 44.45 $ 91,123 $ 45,551
3 14.81 $ 30,361 $ 15,191
4 7.41 $ 15,191 $ -

Market Val $ 30,000

Book Value $ 15,191
Tax rate 21%
Tax Bill $ 3,110.00
ATSV $ 26,890.01
Stock Weight Expected Return
A (1-X) 0.186
B X 0.049
Portfolio Return 0.131

Portfolio Return=(1-X)*0.186+ X*0.049

X=(0.131-0.186)/(0.049-0.186)
Weight_B 0.4015
Returns Geom Return
-0.10 0.90 1.016547
0.13 1.13 1.65%
0.25 1.25
-0.16 0.84
Market Return - E[Rmkt] 5.8%
Market Risk Premium - E 3.6%
Risk-free Rate of Return 2.2%
Beta - β 0.73
Expected Return on Equi 4.83%
Buy Price $19.85
Number of Shares 700
Cost of Initial Stock $13,895
Money Received from Sale $18,240

Capital Gains Yield 31.27%

WACC 0.071

RE 10.30%
RP 8.50%
RD (pretax) 5.20%
RD (after tax) 4.11%
Tax Rate 21.00%

E 3*X
P X

Type of Financing Weight Cost

Equity 3*X 10.30%
Preferred X 8.50%
After-Tax Debt 1-4*X 4.11%
SUM 1 7.10%

WACC=Re*we+Rp*wp+Rd*wd(1-Tc)
7.1%=10.30%*3*X+8.50%*X+(1-4X)*4.11% 2.99% Portfolio cost - after tax debt cost
7.1%-4.11%=X(10.30%*3+8.5%-4*4.11%) 30.90% 3*Equity Cost
2.99%=X(30.9%+8.5%-16.4%) 16.43% 4*Debt Cost
2.99%=X(22.97%) 22.97% 3*Equity Cost + Preferred Cost - 4*Debt Cost
X=13.03% 0.1303 Weight of Preferred
Weight Preferred 0.1303

Type of Financing Weight Cost

Equity 39.08% 10.30%
Preferred 13.03% 8.50%
After-Tax Debt 47.89% 4.11%
SUM 100.00% 7.10%
Stock # Shares Price Per ShareMarket ValueWeight
A 3750 $12 $45,000 0.2553
B 5250 $25 $131,250 0.7447
SUM $176,250 1

Stock # Shares Price Per ShareMarket ValueWeight

A 3750 $9 $33,750 0.2045
B 5250 $25 $131,250 0.7955
SUM $165,000 1

MV of A/Total Portfolio Value=Weight of Stock A

Total Portfolio MV =MV of A/Weight of Stock A
Total Portfolio MV $132,187.50

Weight of B = Calc. MV of B/Total Portfolio MV

MV of B = Total Portfolio MV*Weight of B
Market Value B $98,437.50
Number of Shares B 3937.5
Number of Shares B del -1312.5
Sell 1312.5 shares of Stock B

Stock # Shares Price Per ShareMarket ValueWeight

A 3750 $9 $33,750 0.2553
B 3937.5 $25 $98,438 0.7447
SUM $132,187.5 1
 Year 1 2 3
Units Sold 800,000 820,000 840,000
Price per unit $65 $62 $59
Variable Costs per unit $22 $21.25 $20.50

Pro Forma Income Statement

Year
1 2 3
Sales $52,000,000 $50,840,000 $49,560,000
- Variable Costs ($17,600,000) ($17,425,000) ($17,220,000)
= Gross Profit $34,400,000 $33,415,000 $32,340,000
- Fixed Costs ($5,000,000) ($5,000,000) ($5,000,000)
- Depreciation Expense ($10,000,000) ($10,000,000) ($10,000,000)
= Earnings Before Interest and Taxes $19,400,000 $18,415,000 $17,340,000
- Taxes ($4,074,000) ($3,867,150) ($3,641,400)
= Net Income $15,326,000 $14,547,850 $13,698,600
Note: Taxes calculated as corporate tax rate (21%) multiplied by EBIT. In year 5, the tax bill for the sale of equipmen
Corporate Tax Rate 21%

MACRS 10-year Depreciation

Intial Cost $100,000,000
Depreciation
Depreciation Year 10-Year MACRS Book Value
Expense
1 10% -$10,000,000 $90,000,000
2 18% -$18,000,000 $72,000,000
3 14.4% -$14,400,000 $57,600,000
4 11.52% -$11,520,000 $46,080,000
5 9.22% -$9,220,000 $36,860,000

Market Value at year 5 $40,000,000

Book Value at year 5 $36,860,000
Tax Rate 21%
Tax Bill $659,400
ATSV $36,200,600

Pro Forma Cash Flow Statement

Initial 1 2
OCF $ 25,326,000 $ 24,547,850
NWC $ (10,000,000)
NCS $ (100,000,000)
Cash Flows $ (110,000,000) $ 25,326,000 $ 24,547,850

Required Return 6.790%

NPV $ (5,373,575) The project should be REJECTED because NPV < 0

Weighted Average Cost of Capital - WACC 6.7904%

Total Market Value $553,680,000
Weighted average of Equity - wE 0.2465
Market Value of Equity - E $136,500,000
# shares stock outstanding 1,500,000
price per share $91.00

Weighted Average of Preferred Stock - wP 0.0959

Market Value of Preferred Stock - P $53,100,000
# shares of preferred stock 590,000
Price of preferred stock $90

Weighted average of Debt 0.6576

Market Value of Debt - D $364,080,000
Number of Bonds outstanding 370,000
Sell Price per Bond $984

CAPM Cost of Equity - RE 16.80%

Dividend Growth Rate - g 3.5%
Next Dividend - D1 $12.10
Current Stock Price -P0 $91.00

Cost of Preferred Stock - RP 7.22%

Fixed Dividend - D $6.50
Dividend Rate 6.50%
Par Value/Face Value $100
Current preferred share price - P0 $90

After-Tax Cost of Debt - RD(1-TC) 2.98%

Corporate Tax Rate - TC 21%
YTM/Pre-Tax Cost of Debt - RD 3.767%
Periodic YTM - I% 1.88%
Number of years to maturity 12
Number of periods to maturity - N 24
Number of periods per year - m 2
Coupon rate 3.6%
Periodic Payment - PMT 18
Face Value - FV 1000
Sell price % of Face Value 98.4%
Current Sell Price - PV 984
 4 5
860,000 880,000
$56 $53
$19.75 $19.00

ear
4 5
$48,160,000 $46,640,000
($16,985,000) ($16,720,000)
$31,175,000 $29,920,000
($5,000,000) ($5,000,000)
($10,000,000) ($10,000,000)
$16,175,000 $14,920,000
($3,396,750) ($3,792,600)
$12,778,250 $11,127,400
he tax bill for the sale of equipment is added to increase taxes for year 5.

3 4 5
$ 23,698,600 $ 22,778,250 $ 21,127,400
$ 10,000,000

$ 23,698,600 $ 22,778,250 $ 31,127,400

REJECTED because NPV < 0

State Probability Stock A Stock B Stock C Stock D Portfolio Return
Boom 0.25 -30% -8% 13% -10% -6.08%
Norm 0.45 -4% 2% 5% 3% 1.96%
Recess 0.3 -25% 11% -2% 16% 0.64%

Stock A Stock B Stock C Stock D SUM

Weight 0.2 0.28 0.32 0.2 1
Market Value $5,000 $7,000 $8,000 $5,000 $25,000

Portfolio Return - Boom -0.0608

Portfolio Return - Normal 0.0196
Portfolio Return - Recession 0.0064
Portfolio Return -0.00446
Variance 0.00108943
Stdeva 3.30%
Return on Risk-free Investment - Rf Rf E[Mkt]
Market Risk Premium 3.57% 19.29%

Security Beta E[R] Equivalent Calculated

New Sportswear 0.6 13% Rf + 0.6*(E[Rmkt]-Rf) 0.1300
Old Sportswear 1.3 24% Rf + 1.3*(E[Rmkt]-Rf) 0.2400

System of Equations, multiply the second equation by 0.6/13 and subtract

Rf + 0.6*(E[Rmkt]-Rf) 13%
- 0.6/1.3*(Rf + 1.3*(E[Rmkt]-Rf)) 0.6/1.3*24%=11.1%
Rf + 0.6*(E[Rmkt]-Rf) - 0.462*Rf - 0.6*(E[Rmkt]-Rf) 1.92%

Simply terms in the equation

.538*Rf 1.92%

Solve for Rf
Rf 3.57%

Plug Calculated Rf back into first equation

E[Ra]=Rf + 0.6*(E[Rmkt]-Rf)
E[Ra]=Rf + 0.6*(Y-Rf)

Add in known values to the equation

13=3.57+0.6*(Y-3.57)

Subtract Rf (3.57%) from each side

9.43=0.6*(Y-3.57)
9.43=0.6Y-2.14
11.57=0.6Y
Y=19.29%
E[Rmkt] 19.286%