Corporate Finance

Final term exam - 201912

Albioma SA generates energy from biomass produced by agriculture activities and its agribusiness's energy
partner. It plans to install and run a battery storage project for 3 years. We want to know if it is worth the
money.

Data on investment needs:

The land is already owned at a historical cost of $0.5 million. The firm would resell it at the current market
price of $0.6 million if the project does not go.
A new plant for $2.4 million.
A market research for $0.1 million (already spent).
Straight-line depreciation is used on 3 years.
The project will be sold after 3 years ($0.5 million for the land and $1 million for the plant).
Data on cash flows:
Sales will be $0.8 million in year 1.
Sales will increase by 20% in year 2 and 3
The cost of sales counts for 10% of the sales.
Administrative expenses will be $0.2 million each year.
The corporate tax rate is 30% (the same for capital gain).
Financial expenses will be $0.2 million each year.
The account receivable counts for 10% of the sales.
The inventory counts for 15% of the sales.
The account payable counts for 5% of the sales.
The net working capital must be financed at the end of each year and will be recovered in year 4.
ALBIOMA SA balance sheet is:
Total assets: $1600 million
Total equity: $500 million
Total debt: $1100 million
Financial data:
Risk-free rate: 0.8%.
Beta of the company's stock: 0.7.
Expected return on the market index: 9.6%.
Number of shares listed on the market: 31 million.
The company’s stock price: $23.
The company’s debt is “in fine” with a maturity of 3 years.
The coupon rate is 3% with yearly payment based on a face value of $1100 million. Repayment is at face
value.
The firm's debt is graded B. The spread for this grade is 2%.

NB: Reasoning and calculation are graded separately. Grades for each part are given in parenthesis.

1
1. Estimate the investment cash flow in year 0 (3 points).

In this box, give the formula and/or reasoning (2 points): In this box, detail the calculus and give the result (1 point):

Land -600 000

New plant -2 400 000
Market research is a sunk cost
Initial investment cash flow -3 000 000

2
2. Estimate the operating cash flows for year 1 and for year 4 only (not for years 2 and 3) (5 points).

In this box, give the formula and/or reasoning (4 points): In this box, detail the calculus and give the result (1 points):

+ Sales Year 1
- Cost of sales 800 000
= Gross profit 80 000
720 000
- Administrative expenses
200 000
- Depreciation
800 000
= EBIT
-280 000
- Corporate tax
-84 000
= EBIT x (1 - Tc)
-196 000
+ Depreciation 800 000
= Operating cash flow from the income statement 604 000

Year 4
+ Account receivable 80 000
+ inventories 120 000
- Account payable 40 000
Working capital (WC) 160 000 0
Change in working capital (WCn - WCn-1) 160 000 -230 400

Cash outflows (-) or inflows (+) 444 000 230 400

3
3. Estimate the divestment cash flow in year 3 (2 points).

In this box, give the formula and/or reasoning (1 point): In this box, detail the calculus and give the result (1 point):

Sale of the Land 500 000

Sale of the Plant 1 000 000

Tax on capital gain/loss on the Land (selling price less fair value) -30 000
Tax on capital gain/loss on the Plant (selling price less NAV) 300 000
Net tax on capital gain 270 000

Net Inflow from disinvestment 1 230 000

4
4. Estimate the market debt value (VD) and the cost of debt (kD) (2 points).

In this box, give the formula and/or reasoning (1 point): In this box, detail the calculus and give the result (1 point):

Year 1 2 3
Vd=S coupons/(1+kD)t + principal/(1+kD)3 Future cash flows 33 000 000 33 000 000 1 133 000 000
Present value (i.e. discounted)of future cash flows 32 101 167 31 226 816 1 042 918 967
1 106 246 951

Cost of debt (=Risk free rate + Spread): 2.80%

5
5. Estimate the market equity value (VE) and the cost of equity (kE) (2 points).

In this box, give the formula and/or reasoning (1 point): In this box, detail the calculus and give the result (1 point):

market equity value (VE) = Price per share x number of shares 713 000 000

Cost of equity Ke = Rf + b (Rm - Rf): 6.96%

6
6. Estimate the WACC of the firm (2 points).

In this box, give the formula and/or reasoning (1 point): In this box, detail the calculus and give the result (1 point):

K = Ke Ve/(Ve+Vd) + Kd (1-Tc) Vd/(Ve+Vd) 3.92%

7
7. Assuming a stable financial structure, should the firm invest in this project (4 points)?

In this box, give the formula and/or reasoning (3 point): In this box, detail the calculus and give the result (1 point):
Note that operating cash flows in year 2 and year 3 are respectively
$672800 and $787360.
Calculate the NPV as the sum of all cash flows consumed and
generated by the project discounted at the WACC.
Year: 0 1 2 3 4
If NPV>0 invest. If the NPV<0 reject. CF -3 000 000 444 000 672 800 2 017 360 230 400
DCF -3 000 000 427 253 623 004 1 797 591 197 557
NPV 45 406

Should invest in the project.