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    financeFreek's Avatar
    financeFreek Posts: 3, Reputation: 1
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    #1

    Nov 18, 2010, 09:02 PM
    Finance HW help with Leverages
    So you are analyzing a project and here is what you know:
    Operating Cash Flows After Tax: T=0 -26,355,875; T=1 +12,189,592; T=2 +9,883,453; T=3 +9,224,556; T=4 8,565,659
    Unlevered Beta = 1.08; Risk free rate = 4.1%; Market Return= 9.1%; Straight Line Depreciation; Zero Salvage Value; Tax Rate=30%; Project Life =4 years; Capital Budget=$50 million; The Capital Structure uses 20% debt, and before tax cost of debt= 7%; WACC is to be used as discount & reinvestment rates... The question is to find Levered Beta, Cost of Equity, WACC, NPV, IRR, MIRR, and Net Income. I don't really understand how the 20% debt and 7% before tax cost of debt come into the problem especially with net income. Here is what I guessed, but please check my work!:
    Levered Beta=1.269 1.08*(1+(1-30%)*(20%/80%)) Hamada Equation
    Cost of Equity=10.45% 4.1%+(9.1%-4.1%)*1.269 CAPM
    WACC=9.34% [20%*(7%*(1-30%))] + [80%*10.45%] WACC
    NPV=$6,111,987.82 NPV(9.34%, -26355875,{12189592,9883453,9224556,8565659}) Ti-83 npv function(I, CF0,{CF1.. })
    IRR=20.29% IRR(-26355875,{12189592,9883453,9224556,8565659}) Ti-83 irr function
    MIRR=15.19% MIRR(-26355875,12189592,9883453,9224556,8565659) with 9.34% on Excel
    Net Income=$5,600,623 12189592 + (-26355875/4)

    Please Help!
    Just Looking's Avatar
    Just Looking Posts: 1,610, Reputation: 480
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    #2

    Nov 19, 2010, 12:09 PM

    I was hoping someone else might check this for you. It's been a while since my last finance class. :)

    Thanks for showing your work!

    I agree with the levered beta, cost of equity, WACC.

    I have a slight difference on the NPV. I came up with the following NPV's:

    t=0 -26,355,875
    t=1 11,148,337
    t=2 8,267,050
    t=3 7,056,807
    t=4 5,993,003

    Total 6,109,323

    If you agree with my numbers above, it will slightly change your IRR and MIRR, but they look like they are on the right track. The net income also has to take depreciation into account.
    financeFreek's Avatar
    financeFreek Posts: 3, Reputation: 1
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    #3

    Nov 19, 2010, 12:43 PM
    Comment on Just Looking's post
    I don't know why but Excel and my TI-83 are giving me different answers than what you got and the financial calculators that are online. Any idea why? Also, you said the net income has to take depreciation into account, but isn't that what I did?
    Just Looking's Avatar
    Just Looking Posts: 1,610, Reputation: 480
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    #4

    Nov 19, 2010, 12:57 PM

    I did the NPV by hand. I'd double check your entry first. It's easy to mix up the numbers when inputting. If that isn't the difference, I'd go with your numbers. I can't think of a reason why they'd be different. I did check mine to be sure I didn't have any errors in my calcs, and they seemed okay.

    You are only looking at the cash flow. Depreciation doesn't affect cash flow, but it will decrease net income.
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    financeFreek Posts: 3, Reputation: 1
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    #5

    Nov 19, 2010, 01:40 PM
    Comment on Just Looking's post
    Thanks for all your help! Really appreciated. One last little bit of confusion is still on the net income though. My calculation was $5,600,623=12189592 + (-26355875/4). Isn't the (-26355875/4) representing the depreciation? Thanks!
    Just Looking's Avatar
    Just Looking Posts: 1,610, Reputation: 480
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    #6

    Nov 19, 2010, 01:57 PM

    Oh, I see what you are saying. Sorry. That does seem right for the first year.
    financehelp's Avatar
    financehelp Posts: 2, Reputation: 1
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    #7

    Nov 29, 2010, 08:11 PM
    Comment on Just Looking's post
    What about at 0% leverage? Do you know? If WACC same as equity since percent leverage is 0?
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    financehelp Posts: 2, Reputation: 1
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    #8

    Nov 29, 2010, 08:34 PM
    Also are MIRR and IRR all the same? :)

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