v. The net present value of the project is

iv. The present value of year 3 Free Cash flows is

ii. The Free Cash flow in year 1 is

iii. The present value of year 2 Free Cash flows is

v. What would be the discount factor for the free cash flows two years ahead, if the target leverage ratio is 60% one year from now and 30% two years from now, with cost of debt 5% and 3% respectively? Assume for both of these years debt rebalancing is annual.

iii. If the firm levers up to 60% with cost of debt 5% what will be the WACC of the company?

Keloff´s is a well known cereal brand. Over the previous years its equity beta has been 0.8. Currently, the firm faces interest rate of 2%, cost of debt 4%, market risk premium 8% and corporate tax rate 40%. In the past the firm has maintained a market leverage ratio 40% with continuous rebalancing. For each of the questions below choose the closest answer.

i. What is the WACC of the company currently?

Mike is a sportswear company. Its free cash flow at the end of last year was 2.5B EUR. It is expected that its cash flow will grow at 5% per year indefinitely. Mike has non-operational assets worth 10B EUR and its currently debt free. There are 3 competitors of Mike: Abidas, Leopard and OB with corresponding unlevered betas of 1.2, 1.4 and 1.6. The risk free rate is 2% and the market risk premium 6%. The corporate tax rate is 20%. For each of the questions below choose the closest answer.

i) If Mike´s unlevered beta is the average of the industry, what is Mike´s cost of capital?

iii) The management of Mike is interested in levering up the company. It will do so by means of a sequence of loans of annual maturity. It is anticipated that each of these loans will carry an interest rate equal to the risk free rate. The company will be borrowing every year, so that its outstanding debt grows by 1% per year. If management borrows today 10B what is the present value of all interest rate tax-shields?

Epiphany Industries is considering a new capital budgeting project that will last for three years. Epiphany plans on using a cost of capital of 12% to evaluate this project. Based on extensive research, it anticipates sales of 100,000 in each of the three years. The costs of goods sold will be 50% of the sales. The corporate tax rate is 35% and the anticipated changes of working capital are -5000 for years 1,2 and 10,000 for year 3. To realize this project, Epiphany needs to purchase equipment worth 90,000 at the start of the project which will be depreciated by the straight line method in the next three years. For each of the following questions choose the closest answer.

i. The annual depreciation is