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Final PPT CF
Final PPT CF
Corporate
Finance
Final
Project
RAJIB ALI
FATIMA TU ZEHRA
AMAR KUMAR
Q#1
FAR &Co is a company which operates in constructing
tunnels in mountainous areas. Company is in process of
submitting a bid for construction of 10 km large tunnel in
Baluchistan. As per the map of Economic Corridor. CFO
got following data that was anticipated by managers. The
project initial investment is Rs.2 million with WACC of
10%. Inflow will be Rs.10 on each vehicle which passes
the tunnel. It is anticipated that almost 100,000 vehicles
per year and project will benefit company till 5 years.
Project Manager has calculated NPV of Rs.
Data:
Rs:
NPV
1.7907 m
Years
5 year
Initial cost
2m
Inflow
1m
Vehicles
100000
10
WACC
10%
Sensitivity Analysis:
Change in NPV due to
change in WACC.
WACC = 9%
Rs:
CFC 1
0.91743119
CFC 2
0.84167999
CFC 3
0.77218348
CFC 4
Rs:
0.70842521
CFC 1
CFC 5
0.64993139
CFC 2
0.90909091
NPV
1.88965126
CFC 3
0.82644628
CFC 4
0.7513148
CFC 5
0.68301346
NPV
2.16986545
Change in initial
investment.
initial cost= 1.5m
Rs:
CFC 1
0.90909091
CFC 2
0.82644628
CFC 3
0.7513148
CFC 4
0.68301346
CFC 5
0.62092132
NPV
2.29078677
Change in life of project.
years=3
Change in number of
vehicles.
Rs:
units= 95,000
CFC 1
CFC 2
CFC 3
CFC 4
CFC 5
0.863636364
0.785123967
0.713749061
0.648862783
0.589875257
NPV
1.601247431
CFC 1
0.90909091
CFC 2
0.82644628
CFC 3
0.7513148
NPV
0.48685199
Scenario Analysis
Base
case
Best case
Data:
Data:
Worst
Case
Data:
NPV
Years
Initial cost
1.7907 m
5
2m
NPV
Years
Initial cost
Inflow
Inflow
Vehicle
Per vehicle
revenue
WACC
1m
100,000
10
10%
Vehicles
Per vehicle
revenue
WACC
4.83447 m
5
1m
NPV
1.01110m
Years
Initial cost
2.5 m
1.5 m
100,000
Inflow
.95 m
Vehicles
95,000
15
Per vehicle
revenue
10
9%
WACC
11%
DEGREE OF OPERATING
LEVERAGE
Base case:
DEGREE OF OPERATING
LEVERAGE
Worst case
DEGREE OF OPERATING
LEVERAGE
Best case
Q.NO.2
CASE 1
PROJECT A:
The initial cost of project a is 10,000.
Cash inflows:
2,000
10
1500
1500
2000
2500
3000
2000
1500
2500
3500
CASE 1
Project A
CASE 1
Project B
CASE 1
Project B
IRR Rule:
CONCLUSION
CASE 2 (XYZ)
PROJECT X
PROJECT Y
Question 3
Agency problem case
Put a relevent picture on this slide
Agency problem
Empire building
Entrenching investment
Substantial cost
Losing human capital
Low work and high perks
Solution
Revise compensation plan
Revise incentive plan
Involve shareholders in decision
Question 5
Aslam ltd, a public listed well recognized
energy producing company issue 1million
share to finance its new project of solar
energy. This project has positive NPV but due
to high cost of interest company goes for
issuance of equity.
Face value of each share is Rs.10. Flotation
cost per share including cost of underwriter
was Rs.1. Net proceeds equal 9million.
Project required rate of return is 15%
(calculated by using CAPM model).
No of share
400,000 shares
Rs.10
Rs. 4000,000
100,000 shares
Rs.10
Rs. 1000,000
Total
300,000 shares
Rs. 12
Rs. 3600,000
Total
Rs. 2200,000
During this 10-year company, has not only issued share three
times but buy back and took advantage of low price. When the
price of share went down company buy back share and due to
increased demand pressure price of stock increase.
Date
No of shares
Market price
Price of buyback
Amount paid by
company
Year 2
100,000
Rs. 8
Rs. 9
Rs. 900,000
Year 5
200,000
Rs. 6
Rs. 8
Rs. 1600,000
Year 7
200,000
Rs. 7
Rs. 8
Rs. 1600,000
No of shares
100,000
200,000
200,000
No of shares
Price of buyback
Year 2
Year 5
Year 7
100,000
200,000
200,000
Rs. 9
Rs. 8
Rs. 8
Q#6: Answer.
Thank You