MAGIC WEDNESDAY 1 BULLS

1)

Compare these projects using the NPV method (k=16%) and the Pay-Back Period method. Which one would you choose?
1.b) Check what the amount that you get as NPV means.

| PROJECT A | | PROJECT B | Q0 = | 2.000.000 € | Q0 = | 2.200.000 € | Q1 = | 500.000 € | Q1 = | 800.000 € | Q2 = | 500.000 € | Q2 = | 900.000 € | Q3 = | 600.000 € | Q3 = | 500.000 € | Q4 = | 1,800.000 € | Q4 = | 500.000 € | see excel.

2)

Do it again on the project that you rejected using NPV, but supposing that now we take the advantages of gearing (50% of the initial investment, annual interest rate 8% to be paid at the end of each year, and loan repayment at the end of the 4th year). see excel.

3)

Our company has got an EBITDA to 120.000 €. The Corporate Tax is a 25% on pretax profit. Our Pay-out Policy is 45%. We record a depreciation expense to 30.000€. There are no provisions, but there is a negative financial result to 4.000 €. As we consider depreciation as an internal financial source, can you calculate how much is the retained cashflow due to this depreciation expense? see excel

4)

MARGIN CALL S.A. shows the following Capital Structure:
Owner’s equity: 5
Self-financing: 3 (Reserves from retained earnings)
Debt: 10
The company wants to maintain this structure unchanged. At the end of the year, a retained profit to 1,2 is recorded in the accounting records.
Using the self-financing multipliyer,
Nada! “Automáticamente” nada!!!!

¿Should the company make some additional decisions to maintain its Capital Structure?.

ΔL = [ 1 / (1 – γ) ] ΔR
And then: ΔD = ΔL – ΔR

L= E + R + D = 5 + 3 + 10 = 18 ϒ = D/L = 10/18 = 0,5555…

ΔR = 1,2 ; ΔL = ΔR / (1-ϒ) = 1,2/ (1-0,5555) = 2,7

ΔD = ΔL – ΔR = 2,7 – 1,2 = 1,5

So, the company must increase Debt (+1,5) to maintain its Capital Structure unchanged.

Let’s check it:

D + ΔD