“Case Study Assignment”

Course Code: BUS 302

Course Title: Financial Management
Section: 01
Summer 2023

Submitted To:
Shafayat Hossain Chowdhury
Senior Lecturer
School of Business
University of Liberal Arts Bangladesh

Submitted By:

Serial No. Name ID

01 Sattajit Das 183011023

02 Jannatul Ferdous 201011133

03 Zakia Islam 201011147

04 Sayma Tasnim 193011018

05 Fahimur Rahman 191011084

Department: BBA
University of Liberal Arts Bangladesh

Date of Submission: 15/08/23

 Case Study Assignment:

Q. 01: Calculate WACC and net present value for each alternative.

Answer: Calculations for Fuel-Based Buses:

Given that,
Initial Investment = BDT 100,000,000
As the firm follows a 40% debt ratio, therefore, Debt Requirement = BDT 100,000,000 x 40%
= BDT 40,000,000
Hence,
Equity Requirement = BDT 100,000,000 x 60% = BDT 60,000,000

Weight of Debt, Wd= 40,000,000/100,000,000 = 0.4

Weight of Preferred Stock, Wps= [(60,000,000/2)/100,000,000] = 0.3
Weight of Common Stock, Wcs= [(60,000,000/2)/100,000,000] = 0.3
Tax Rate, T = 25% =0.25
& Cost of Debt, rd = 10%

We know,
After-Tax Cost of Debt, rdt = rd (1-T) = 10% (1-0.25) = 10% x 0.75 = 0.075 = 7.5%

For Preferred Stock,

Market Price of Stock, P0 = BDT 100
Expected Dividend, D1 = BDT 10
& Flotation Cost, F = Flotation Cost in Amount/Market Price of Stock = 2.5/100 = 0.025

We know,
Cost of Preferred Stock, rps = D1/ P0 (1-F) = 10/100 (1-0.025) = 0.1026 = 10.26%

For Common Stock Given that,

Market Price of Stock, P0 = BDT 80
Expected Dividend, D1 = BDT 6
Growth Rate, g = 6% = 0.06
& Flotation Cost, F = Flotation Cost in Amount/Market Price of Stock = 3/80 = 0.04

We know,
Cost of Common Stock, rcs = [D1/ P0 (1-F)] + g = [6/80 (1-0.04)] + 0.06 = 0.1381 = 13.81%

We know,
Weighted Average Cost of Capital, WACCFuel = (Wd x rdt) + (Wps x rps) + (Wcs x rcs) + (Wre x rre)
= (0.4 x 7.5%) + (0.3 x 10.26%) + (0.3 x 13.81%) + 0
= 0.1022
=10.22%
Again,
Future Expected Cash Flow for Year 1, ĈF1 = BDT 50,000,000 + Last 7 digits of Group Member (Sattajit) 1 ID
= BDT (50,000,000 + 3,011,023)
= BDT 53,011,023

Future Expected Cash Flow for Year 2, ĈF2 = 50,000,000 + Last 7 digits of Group Member 2 (Jannatul) ID
= BDT (50,000,000 + 1,011,133)
= BDT 51,011,133

Future Expected Cash Flow for Year 3, ĈF3 = BDT 40,000,000 + Last 7 digits of Group Member 3 (Zakia) ID
= BDT (40,000,000 + 1,011,147)
= BDT 41,011,147

Future Expected Cash Flow for Year 4, ĈF4 = BDT 30,000,000 + Last 7 digits of Group Member 4 (Sayma) ID
= BDT (30,000,000 + 3,011,018)
= BDT 33,011,018

Future Expected Cash Flow for Year 5, ĈF5 = BDT 30,000,000 + Last 7 digits of Group Member 5 (Fahim) ID
= BDT (30,000,000 + 1,011,084)
= BDT 31,011,084

& Discounting Rate, r = WACCFuel = 0.1022

Therefore,
53,011,023 51,011,133 41,011,147
Net Present Value, NPVFuel = -100,000,000 + + + +
(1+0.1022)^1 (1+0.1022)^2 (1+0.1022)^3
33,011,018 31,011,084
+ = BDT 62,145,157.57
(1+0.1022)^4 (1+0.1022)^5
Calculations for Electric Buses:
Given That,
Initial Investment = BDT 180,000,000
Debt Requirement = BDT 180,000,000 x 40% = BDT 72,000,000
Hence,
Equity Requirement = BDT (18 Crore – 7.2 crore) = BDT 10.8 Crore = BDT 108,000,000

Weight of Debt, Wd = 72,000,000/180,000,000 = 0.4

Weight of Preferred Stock, Wps = [(108,000,000/2)/180,000,000] = 0.3
Weight of Common Stock, Wcs = [(108,000,000/2)/180,000,000] = 0.3
Tax Rate, T = 25% = 0.25
& Cost of Debt, rd = 6%

We know,
After-Tax Cost of Debt, rdt = rd (1-T) = 6% (1-0.25) = 6% x 0.75 = 0.045 = 4.5%

For Preferred Stock,

Market Price of Stock, P0 = BDT 100
Expected Dividend, D1 = BDT 10
& Flotation Cost, F = Flotation Cost in Amount/Market Price of Stock = 2.5/100 =0.025

We know,
Cost of Preferred Stock, rps = D1/ P0 (1-F) = 10/100 (1-0.025) = 0.1026 = 10.26%

For Common Stock,

Market Price of Stock, P0 = BDT 80
Expected Dividend, D1 = BDT 6
Growth Rate, g = 6% = 0.06
& Flotation Cost, F = Flotation Cost in Amount/Market Price of Stock = 3/80 =0.04

We know,
Cost of Common Stock, rcs = [D1/ P0 (1-F)] + g = [6/80 (1-0.04)] + 0.06 = 0.1381 = 13.81%

We know,
Weighted Average Cost of Capital, WACCElectric = (Wd x rdt) + (Wps x rps) + (Wcs x rcs) + (Wre x rre)
= (0.4 x 4.5%) + (0.3 x 10.26%) + (0.3 x 13.81%) + 0
= 0.0902
= 9.02%
Again,
Future Expected Cash Flow for Year 1, ĈF1 = BDT 50,000,000 + Last 7 digits of Group Member 5 (Fahim) ID
= BDT (50,000,000 + 1,011,084)
= BDT 51,011,084

Future Expected Cash Flow for Year 2, ĈF2 = BDT 50,000,000 + Last 7 digits of Group Member 4 (Sayma) ID
= BDT (50,000,000 + 3,011,018)
= BDT 53,011,018

Future Expected Cash Flow for Year 3, ĈF3 = BDT 50,000,000 + Last 7 digits of Group Member 3 (Zakia) ID
= BDT (50,000,000 + 1,011,147)
= BDT 51,011,147

Future Expected Cash Flow for Year 4, ĈF4 = 50,000,000 + Last 7 digits of Group Member 2 (Jannatul) ID
= BDT (50,000,000 + 1,011,133)
= BDT 51,011,133

Future Expected Cash Flow for Year 5, ĈF5 = BDT 50,000,000 + Last 7 digits of Group Member (Sattajit) 1 ID
= BDT (50,000,000 + 3,011,023)
= BDT 53,011,023

& Discounting Rate, r = WACCElectric = 0.0902

Therefore,
51,011,084 53,011,018 51,011,147
Net Present Value, NPVElectric = -180,000,000 + + + +
(1+0.0902)^1 (1+0.0902)^2 (1+0.0902)^3
51,011,133 53,011,023
+ = BDT 21,293,806.86
(1+0.0902)^4 (1+0.0902)^5
Q. 02: Which alternative should be chosen considering financial vitality and why? (Assume that the
alternatives are mutually exclusive).

Answer: Between the two alternatives: fuel-based buses and electric buses, the project for the fuel-based bus
service has a higher NPV. While making investment decisions, a project with a higher NPV is always
considered to be selected because it indicates that an investment might be profitable. In this scenario, NPV fuel
shows that the investment for fuel-based buses would generate a future cash stream that exceeds the capital
invested in the project meaning the fuel project is anticipated to produce more value over its lifetime than the
electric-powered bus project. As NPVfuel (Best NPV between the 2 options) > NPVelectric and the alternatives are
mutually exclusive, the project for fuel-based buses should be chosen considering financial vitality.

Q. 03: Would your answer in 2 change considering environmental sustainability? Support your answer.

Answer: Though Bangladesh is responsible for only 0.4% of GHG emissions, the country is vulnerably
suffering in terms of temperature rise, agricultural losses, and environmental catastrophes due to climate
change. So to resolve this issue by 2030, the country intends to minimize its GHG impact by 21.8%. In
compliance with the country’s commitment, ABC Company is designing its objectives to become ecologically
and socially sustainable and therefore emphasizing on financially sound green investment opportunities.

Electric buses do not release any harmful pollutants into the environment like fuel-based buses because they
don’t use gas to operate. This contributes to a decrease in GHG formation and thus helps eliminate the negative
effects of air pollution and global warming. They also lessen noise pollution problems because they vibrate less.
Due to these advantages, ABC Company will prefer to initiate the Electric Bus service, however, this project is
more expensive. On top of that, the NPV for the Fuel Bus project is better and the difference between NPVFuel
and NPVelectric is relatively high which is (BDT 62,145,157.57 - BDT 21,293,806.86) = BDT 40,851,350.71.
Therefore, there is a possibility of having very less profitability if the company chooses to invest in the Electric
bus project. Though environmental sustainability is very important, the company should still stick to the fuel-
based investment as the other option is less feasible in financial aspects.