Get Instant Help From 5000+ Experts For

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing:Proofread your work by experts and improve grade at Lowest cost

## Question 1

You are considering taking out an \$800,000 30-year loan with equal monthly payments with a bank, which quotes annual rates on its deposits and loans of 1.2% and 3.6%, respectively

(a) Without constructing a loan amortization schedule,

(i) calculate the amount of interest that will be paid in the first month of the 25th year into the loan

(ii) calculate the total amount of interest that will be paid over the life of the loan.

(b) Interpret your answer for (a)(ii) and discuss the limitation(s), if any, of such an interpretation

(c) Calculate the present value of the loan payments using a discount rate of 1.2%

(d) Interpret your answer for (c) as well as the difference between that answer and the actual loan principal. What can explain this difference?

2.Holdings, an Asia-Pacific telecommunications company, has excess capital and is looking to make a regional telecommunications investment. S. Corp won the contract to advise T. Holdings on the potential of the investment, and allows T. Holdings to pay for its charges in annual installments, starting at \$2 million for the next year, and increasing at 10% annually until the final installment in the fifth year.

The project under consideration entails an initial infrastructural investment of \$600 million, and subsequent investments of the same amount every five years. These assets will be depreciated on a straight-line basis to a book value of zero five years from the purchase, but can be salvaged for approximately half the original investment amount. Revenue for the next year is projected to be \$800 million, and is expected to grow at an annual rate of 20% for four years (i.e., years 2 through 5), after which revenues are expected to remain at that level indefinitely. Annual variable costs and year-end net working capital associated with the project are estimated to be 30% and 10% of annual revenue respectively, and fixed costs are estimated to be \$80 million per year

Neither the debt nor equity of T. Holdings is traded, but S. Corp reckons they are worth \$3 billion and \$6 billion respectively. In the immediate future, T. Holdings intends to recapitalize by issuing equity to repay all of their outstanding debt. In addition, S. Corp looked into Good Inc. and Bad Inc.—the former is a conglomerate with businesses such as global telecommunications, food and beverage, and financial services, whereas the latter is a pure-play which focuses on developing their telecommunications business in the AsiaPacific. Also, S. Corp provides the following information on these entities:

(a) (i) Calculate and justify a suitable weighted average cost of capital based on T. Holdings’ existing capital structure.

(ii) Justify and calculate a suitable discount rate for the telecommunications project.

(b) (i) Compute operating cash flows for the first five years.

(ii) Compute changes in net working capital for the first five years.

(iii) Compute NPV based on cash flow from assets for the first five years.  (iv) Should T. Holdings accept the telecommunications project?

3.

Debt-free, Inc., an unlevered firm, is planning to use debt in its capital structure. The firm currently has 5,000 shares outstanding trading at \$60 per share. The firm plans to sell 150 6% annual-coupon, 10-year bonds at their face values of \$1,000 each and use the proceeds to repurchase some of its shares. When the bonds mature, Debt-free, Inc. plans to reissue new bonds to pay off the principal and to “roll over” its debt this way indefinitely. Assume the firm’s cost of debt does not change and there are no costs of financial distress. Earnings before interest and tax are expected to remain at \$28,000 per year forever and the firm has a dividend policy of paying out all of its earnings. Maureen currently owns 100 shares of Debtfree, Inc

(a) (i) Calculate the total dollar annual dividend Maureen receives under the firm’s existing capital structure.

(ii) If the market learns of the capital restructuring before the exercise is completed, how many shares are repurchased under the planned capital restructuring?

(iii) Calculate total dollar annual dividend Maureen receives under the firm’s planned capital structure.

(iv) Debt-free, Inc. completes its planned capital restructuring but Maureen prefers the annual dividend payout of the unlevered firm. What is Maureen’s cash flow from homemade leverage by referencing the levered firm’s capital structure and assuming that she can borrow and lend at the same rate as the firm?

(v) Is capital structure irrelevant? Explain. (b) Redo part (a) assuming a one-tier corporate tax rate of 20% applies. Ignore personal income taxes.

 Particulars Value Rate 0.30% Time 360 Amount 800,000 Monthly payment \$3,637.16
 Particulars Value Rate 0.30% Time 288 Amount 800,000 Monthly payment \$3,637.16 Loan outstanding after 24 years \$235,208.19 Interest paid in 1st month of 25th year \$705.62
 Particulars Value Monthly payment \$       3,637.16 Time 360 Amount \$   800,000.00 Total interest paid \$   509,378.61

From the evaluation, it can be detected that the total interest paid during the period of 30 years is approximately 60% of the total loan amount. In addition, the major limitation is the term of the loan, while the refinancing is also conducted a draw back.

 Particulars Value Rate 0.10% Time 360 Monthly payment \$3,637.16 Present Value \$1,099,143.92

The major difference between the above solution is the difference in interest rate, which directly indicate that borrowing is much more benefits than to lend.

 Particulars Good Inc Bad Inc Beta 1.80 1.20 Market value of equity \$ 10,000,000,000 \$ 4,000,000,000 Market value of debt \$ 20,000,000,000 \$ 2,000,000,000 Total \$ 30,000,000,000 \$ 6,000,000,000 Face value of debt \$ 22,000,000,000 \$ 2,200,000,000 Years to debt maturity 15 5 Annual coupon rate 10% 8% Risk free rate 5% 5% Return on Market 15% 15% cost of equity 23.00% 17.00% WACC 13.00% 13.47%

The calculation is relevantly conducted in the above table, which depicts values of WACC for T. Holdings. The debt and equity combination of Bad Inc is supporting the current capital structure of T. Holdings. Hence, the WACC of 13.47% can be used for T. Holdings.

 Particulars Bad Inc Beta 1.20 Market value of equity \$ 4,000,000,000 Market value of debt \$ 2,000,000,000 Total \$ 6,000,000,000 Face value of debt \$ 2,200,000,000 Years to debt maturity 5 Annual coupon rate 8% Risk free rate 5% Return on Market 15% cost of equity 17.00% WACC 13.47%

The discount rate of 13.47% can be used for the computation of the NV analysis for the projects proposed to T. Holdings.

 Particulars 1 2 3 4 5 Revenue \$         800,000,000 \$ 960,000,000 \$ 1,152,000,000 \$ 1,382,400,000 \$ 1,658,880,000 Variable cost \$         240,000,000 \$ 288,000,000 \$    345,600,000 \$    414,720,000 \$    497,664,000 Fixed cost \$           80,000,000 \$   80,000,000 \$      80,000,000 \$      80,000,000 \$      80,000,000 Payments \$             2,000,000 \$     2,200,000 \$        2,420,000 \$        2,662,000 \$        2,928,200 Salvage \$    300,000,000 Depreciation \$         120,000,000 \$ 120,000,000 \$    120,000,000 \$    120,000,000 \$    120,000,000 EBIT \$         358,000,000 \$ 469,800,000 \$    603,980,000 \$    765,018,000 \$    658,287,800 Tax \$           71,600,000 \$   93,960,000 \$    120,796,000 \$    153,003,600 \$    131,657,560 PAT \$         286,400,000 \$ 375,840,000 \$    483,184,000 \$    612,014,400 \$    526,630,240 Cash flow \$         406,400,000 \$ 495,840,000 \$    603,184,000 \$    732,014,400 \$    646,630,240
 Particulars 1 2 3 4 5 Net working capital \$           80,000,000 \$   96,000,000 \$    115,200,000 \$    138,240,000 \$    165,888,000 Net Change in working capital \$   16,000,000 \$      19,200,000 \$      23,040,000 \$      27,648,000
 Particulars 0 1 2 3 4 5 Cash Flow \$        (680,000,000) \$ 406,400,000 \$    479,840,000 \$    583,984,000 \$    708,974,400 \$ 618,982,240 NPV \$ 1,207,448,769.49

The calculation conducted in the above table directly indicates positive NPV values, which can allow T. Holding to improve its financial condition in future.

 Particulars Value Earnings \$      28,000 Number of shares 5,000 Dividend per share \$          5.60 Maureen shares @100 \$           560
 Particulars Value 150 Bonds @1000 \$    150,000 Market value per share \$             60 Number of shares repurchased 2,500
 Particulars Value Earnings Before Interest \$      28,000 Interest@6% \$        9,000 Earnings \$      19,000 Number of shares 2,500 Dividend per share \$          7.60 Maureen shares @100 \$           380
 Particulars Value Unlevered firm \$           560 Levered firm \$           380 Investing in Bonds \$           360

The new condition of Debt-free Inc will be problematic for the shareholders, as the debt-to-equity ratio is 1:1, which will reduce the shareholders’ value and raise debt payments.

 Particulars Value Earnings \$   28,000 Tax \$     5,600 EAT \$   22,400 Number of shares 5,000 Dividend per share \$       4.48 Maureen shares @100 \$        448
 Particulars Value 150 Bonds @1000 \$ 150,000 Market value per share \$          60 Number of shares repurchased 2,500
 Particulars Value Earnings Before Interest \$   28,000 Interest@6% \$     9,000 Earnings \$   19,000 Tax \$     3,800 EAT \$   15,200 Number of shares 2,500 Dividend per share \$       6.08 Maureen shares @100 \$        304
 Particulars Value Unlevered firm \$        448 Levered firm \$        304 Investing in Bonds \$        360

The debt combination of the firm is problematic, as it will reduce shareholders values and increase debt payments.

Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University Press.

DeAngelo, H. and Stulz, R.M., 2015. Liquid-claim production, risk management, and bank capital structure: Why high leverage is optimal for banks. Journal of Financial Economics116(2), pp.219-236.

Robb, A.M. and Robinson, D.T., 2014. The capital structure decisions of new firms. The Review of Financial Studies27(1), pp.153-179.

Zeitun, R. and Tian, G., 2014. Capital structure and corporate performance: evidence from Jordan.

Cite This Work

To export a reference to this article please select a referencing stye below:

My Assignment Help. (2020). Loan Amortization Schedule, Investment Analysis, Capital Restructuring, And Essay.. Retrieved from https://myassignmenthelp.com/free-samples/fin303-financial-management/loan-payment.html.

"Loan Amortization Schedule, Investment Analysis, Capital Restructuring, And Essay.." My Assignment Help, 2020, https://myassignmenthelp.com/free-samples/fin303-financial-management/loan-payment.html.

My Assignment Help (2020) Loan Amortization Schedule, Investment Analysis, Capital Restructuring, And Essay. [Online]. Available from: https://myassignmenthelp.com/free-samples/fin303-financial-management/loan-payment.html
[Accessed 22 July 2024].

My Assignment Help. 'Loan Amortization Schedule, Investment Analysis, Capital Restructuring, And Essay.' (My Assignment Help, 2020) <https://myassignmenthelp.com/free-samples/fin303-financial-management/loan-payment.html> accessed 22 July 2024.

My Assignment Help. Loan Amortization Schedule, Investment Analysis, Capital Restructuring, And Essay. [Internet]. My Assignment Help. 2020 [cited 22 July 2024]. Available from: https://myassignmenthelp.com/free-samples/fin303-financial-management/loan-payment.html.

Get instant help from 5000+ experts for

Writing: Get your essay and assignment written from scratch by PhD expert

Rewriting: Paraphrase or rewrite your friend's essay with similar meaning at reduced cost

Editing: Proofread your work by experts and improve grade at Lowest cost

250 words