MT Quiz4B Solutions xlsx 1 Professional Electives 2 Cost of Capital = 0 04 + 1 5 (0 08 0 04) Cost of Capital = 0 04 + 1 5 (0 04) Cost of Capital = 0 04 + 0 06 Cost of Capital = 10 00% (₱ 750 x 12) ₱ 5[.]
1 Professional Electives MT-Quiz4B Solutions Using Capital Asset Pricing Method (CAPM), compute the cost of capital (equity) with a risk-free rate of 4%, market return of 8%, and BETA of 1.5 Cost of Capital Cost of Capital Cost of Capital Cost of Capital = = = = 0.04 + 1.5 (0.08 - 0.04) 0.04 + 1.5 (0.04) 0.04 + 0.06 10.00% Sonny is looking to buy a property that costs P115,000 and can be leased out for P750 a month He has done some research and has determined the net operating expenses to be P5,000 per year His desired capitalization rate is 10% What is the appraisal value of his property using the capitalization of earnings approach? Equity Value Equity Value Equity Value Equity Value (₱ 750 x 12) - ₱ 5,000 10% ₱ 9,000 - ₱ 5,000 = 10% ₱ 4,000 = 10% = ₱ 40,000 = With a risk-free rate of 6%, Beta of 1.5, market return of 8%, prevailing credit spread of 3%, tax rate of 30%, and an Equity ratio of 30%, using the CAPM method compute the cost of equity Cost of Equity Cost of Equity Cost of Equity Cost of Equity = = = = 0.06 + 1.5 (0.08 - 0.06) 0.06 + 1.5 (0.02) 0.06 + 0.03 9.00% Silver Company for the last ten years has earned and had cash flows of about P600,000 every year As per the predictions of the company’s earnings, the same cash flow would continue for the foreseeable future The expenses for the business every year is about P500,000 only Based on the available public information a P4 million Treasury Bond has a prevailing return of P40,000 quarterly Using the Capitalization of Earnings approach, what is the value of HCB Company? Equity Value Equity Value Equity Value Equity Value ₱ 600,000 - ₱ 500,000 (₱ 40,000 x 12) ÷ ₱ 4,000,000 ₱ 100,000 = ₱ 160,000 ÷ ₱ 4,000,000 ₱ 100,000 = 4.00% = ₱ 2,500,000 = Income-based Valuation Using Weighted Average Cost of Capital (WACC), ignoring taxes, compute the cost of capital of a company with a debt ratio of 0.75:1 and pay yearly average interest for its loans of 4% and dividend rate of 5% yearly WACC WACC WACC = (0.05 x 0.25) + (0.04 x 0.75) = 0.0125 + 0.03 = 4.25% The appropriate WACC of a firm is 6.43% with the risk-free rate of 4%, market return of 8%, prevailing credit spread of 3%, a tax rate of 30%, and an Equity ratio of 30%, compute for the volatility of stocks or BETA WACC: 0.0643 0.0643 0.0643 0.3Ke 0.3Ke 0.3 Ke CAPM: 0.1 0.1 0.1 0.04β 0.04β 0.04 β (Ke x 0.3) + [(0.04 + 0.03) x 0.7 x 0.7] 0.3Ke + (0.07 x 0.7 x 0.7) 0.3Ke + 0.0343 0.0643 - 0.0343 0.03 = 0.3 = 10.00% = = = = = = = = 0.04 + β (0.08 - 0.04) 0.04 + β (0.04) 0.04 + 0.04β 0.1 - 0.04 0.06 = 0.04 = 1.5 Silver, Inc expects to generate earnings over the next five years of P50,000; P60,000; P65,000; P70,000, and P75,000 Using the Capitalization of Earnings Method, what is the estimated value of the firm using a 10.00% required rate of return? Equity Value Equity Value Equity Value (₱ 50,000 + ₱ 60,000 + ₱ 65,000 + ₱ 70,000 + ₱ 75,000) / 10.00% ₱ 64,000 = 10.00% = ₱ 640,000 = The appropriate WACC of a firm is 6.43% with the risk-free rate of 4%, market return of 8%, prevailing credit spread of 3%, a tax rate of 30%, and an Equity ratio of 30%, compute for the after-tax cost of debt Cost of debt Cost of debt = (0.04 + 0.03) x 0.7 = 4.90% Professional Electives Silver Corporation for the last ten years, has earned and had cash flows of about P600,000 every year As per the predictions of the company’s earnings, the same cash flow would continue for the foreseeable future The expenses for the business every year is about P500,000 only Based on the available public information a P4 million Treasury bond has a prevailing return of P40,000 quarterly Using the Capitalization of Earnings approach, assuming Silver would sell 20% of its shareholdings, what will be the minimum selling price? Equity Value Equity Value Equity Value Equity Value Min Selling Price Min Selling Price ₱ 600,000 - ₱ 500,000 (₱ 40,000 x 12) ÷ ₱ 4,000,000 ₱ 100,000 = ₱ 160,000 ÷ ₱ 4,000,000 ₱ 100,000 = 4.00% = ₱ 2,500,000 = = ₱ 2,500,000 x 20% = ₱ 500,000 10 Silver Corporation is planning to expand and a new project is expected to earn an average of P375,000 annually If the project requires for P5,000,000 investment at 10% cost of capital Compute for the Economic Value Added EVA EVA EVA = ₱ 375,000 - (₱ 5,000,000 x 10%) = ₱ 375,000 - (₱ 500,000) = (₱ 125,000) ... 0.3Ke + (0.07 x 0.7 x 0.7) 0.3Ke + 0.0343 0.0643 - 0.0343 0.03 = 0.3 = 10.00% = = = = = = = = 0.04 + β (0.08 - 0.04) 0.04 + β (0.04) 0.04 + 0.04β 0.1 - 0.04 0.06 = 0.04 = 1.5 Silver, Inc expects... firm is 6.43% with the risk-free rate of 4%, market return of 8%, prevailing credit spread of 3%, a tax rate of 30%, and an Equity ratio of 30%, compute for the after-tax cost of debt Cost of... 10% cost of capital Compute for the Economic Value Added EVA EVA EVA = ₱ 375,000 - (₱ 5,000,000 x 10%) = ₱ 375,000 - (₱ 500,000) = (₱ 125,000)