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Net Income Approch

This document contains information on several approaches to calculating weighted average cost of capital (WACC), including: 1) The net income approach is demonstrated for two example companies calculating WACC based on earnings before interest and taxes (EBIT), interest expense, tax rates, and cost of equity. 2) The traditional approach calculates WACC using market values of debt and equity, cost of debt, and cost of equity. 3) The Modigliani-Miller approach demonstrates their proposition 1 using levered and unlevered firms, debt levels, tax rates, and costs of capital. 4) Additional examples calculate WACC using the net operating income approach and traditional methods.

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Mahedrz Gavali
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71 views11 pages

Net Income Approch

This document contains information on several approaches to calculating weighted average cost of capital (WACC), including: 1) The net income approach is demonstrated for two example companies calculating WACC based on earnings before interest and taxes (EBIT), interest expense, tax rates, and cost of equity. 2) The traditional approach calculates WACC using market values of debt and equity, cost of debt, and cost of equity. 3) The Modigliani-Miller approach demonstrates their proposition 1 using levered and unlevered firms, debt levels, tax rates, and costs of capital. 4) Additional examples calculate WACC using the net operating income approach and traditional methods.

Uploaded by

Mahedrz Gavali
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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net income approch

ebit 100,000 ebit 100,000


debt 300,000 less:interst 30000
intrest 10% eat 70,000
equity 560000 earning 70,000
cost of equity 12.50%

ebit 10000 ebit 10000


debt 50000 less:interst 3000
intrest 0.06 eat 7000
equity 70000 earning 7000
cost of equity 0.1

net operating income approch


EBIT 50000 VOF 400000
DEBT 200000 EQUITY 200000
K_D 0.1 K_E 0.15
WACC 0.125 VERIFACTION 0.125

Traditional Approach
DEBT 300000 EQUITY 705882.35294118 DEBT
K_D 0.1 VOF 1005882.3529412 K_D
K_E 0.17 WACC 14.9122807018 K_E
EBIT 150000 EBIT

MODIGLIANI & MILLER APPROCH


proposition 1

LIVERED UNLIVERED
FIRM(FIRM B) AMT AMT (FIRM A)
EBIT 200000 EAT 100000 EBIT
DEBT 1000000 EQUITY 625000 DEBT
K_D 0.1 VOF 1625000 K_D
K_E 0.16 K_O 12.307692 K_E

ARBITRAGE PROCESS

INVESTOR
HOLDING(L) 0.15

EQUITY HOLDING 93750


DEBT HOLDING 0.15

TOTAL DEBT
HOLDING 150000
TOTAL FUND
AVAILABLE 243750
value of equity 560000
vof 860,000
waac 11.62791

value of equity 70000


vof 120000
waac 8.333333

500000 EQUITY 450000 DEBT 0 EQUITY


0.12 VOF 950000 K_D 0 VOF
0.2 WACC 15.78947 K_E 0.16 WACC
150000 EBIT 150000

AMT AMT
200000 EAT 200000
0 EQUITY 1600000
0 VOF 1600000
0.125 K_O 12.5

ARBITRAGE PROCESS INVESTOR SHARE IN PROFIT


UL(A) L(B)
MARKET VALUE
OF(UL) FIRM EAT 200000 100000
INVESTOR SHARE SHARE IN
IN (UL) 15.23438 PROFIT 30468.75 15000
LESS 15000 0

total share
in profit 15468.75 15000
937500
937500
16
Average rate return
problem 1
project cost 130000 depreciation
life of project 6 padt
cash inflow 32000 average investment
salvage value 10500 ARR

problem 3 (replacement)

Resale value 10000 depreciation


annual revenue 150000 Incremental NOI
operating exp 60000 Incremental invest
new machine 360000 ARR
life of machine 12
salavage value 0

Payback period
problem 1
machine A
years 1 2 3 4
sales qty 1000 1500 2000 2600
sales 100000 150000 200000 260000
less fixed cost 60000 60000 60000 60000
40000 90000 140000 200000
less variable cost 20000 30000 40000 52000
EBDT 20000 60000 100000 148000
less:dep 20000 16000 12800 10240
EBT 0 44000 87200 137760
EAT 0 22000 43600 68880
CFAT 20000 38000 56400 79120
CCFAT 20000 58000 114400 193520
bal to recoverd 42000
bal recovery 0.7446808511
months 8.9361702128
days 28.085106383
PBP 2 years ,8 months, 28 days.
machine B
years 1 2 3 4
sales qty 1200 1600 2200 2500
sales 120000 160000 220000 250000
less fixed cost 70000 70000 70000 70000
50000 90000 150000 180000
less variable cost 24000 32000 44000 50000
EBDT 26000 58000 106000 130000
less:dep 30000 24000 19200 15360
EBT -4000 34000 86800 114640
EAT 0 17000 43400 57320
CFAT 30000 41000 62600 72680
CCFAT 30000 71000 133600 206280
bal to recoverd 16400
bal recovery 0.2619808307
months 3.1437699681
days 4.3130990415
PBP 3 years,3months,4 days

Payback profitabilty
problem 1
particular project
a b c
intial investment 12 12 12
cash revenue 16 14 12
less :expenses 8 7 6
ebdt 8 7 6
less:depreciation 4 4 4
ebt 4 3 2
less tax 1.4 1.05 0.7
eat 2.6 1.95 1.3
CFAT 6.6 5.95 5.3
PBP 1.8181818182 2.0168067227 2.2641509434
PBP 7.8 5.85 3.9

NPV METHOD
particular project
a b c 10%
intial investment 12 12 12
cash revenue 16 14 12
less :expenses 8 7 6
ebdt 8 7 6
less:depreciation 4 4 4
ebt 4 3 2
less tax 1.4 1.05 0.7
eat 2.6 1.95 1.3
CFAT 6.6 5.95 5.3
life of project 3 3 3
pvf 2.486851991 2.486851991 2.486851991
pvcfat 16.4132231405 14.7967693464 13.1803155522
npv 4.4132231405 2.7967693464 1.1803155522

problem 2

initial investment -2500000 pv factor pvcfat


cash inlow 900000 0.9090909091 818181.8
cash inlow 800000 0.826446281 661157.0
cash inlow 700000 0.7513148009 525920.4
cash inlow 600000 0.6830134554 409808.1
cash inlow 500000 0.6209213231 310460.7
total 2725527.9
rate 10%
npv 225527.9

problem 3

year project a rs year project b


0 cash flow 60000 0 cash flow
1 cash flow 20 1 cash flow
2 cash flow 20 2 cash flow
3 cash flow 20 3 cash flow
4 cash flow 20 4 cash flow
5 cash flow 20 5 cash flow
6 cash flow 20 6 cash flow
total 120 total
ko 10% npv
pvf 4.3552606995
pvfcfat 87105.21
npv 27105.21
problem 2
19916.667 project cost 1050000 depreciation 225000
12083.333 life of project 4 padt 1420000
70250 cash inflow 1420000 average profit 130000
17.200474 salvage value 150000 average investment 600000
ARR 21.666667
problem 4 (cost reduction)
equipment
30000 costing 45000 depreciation 3000
60000 cost saving 12000 net cost saving 6000
350000 life of project 15 ARR 13.333333
17.142857 operating exp 3000
salvage valu 0

calculation of depreciation
5 machine cost 100000
3000 less:dep 20000
300000 80000
60000 less:dep 16000
240000 64000
60000 less:dep 12800
180000 51200
8192 less:dep 10240
171808 40960
85904 less:dep 8192
94096 total 32768

5 machine cost 150000


3000 less:dep 30000
300000 120000
70000 less:dep 24000
230000 96000
60000 less:dep 19200
170000 76800
12288 less:dep 15360
157712 61440
78856 less:dep 12288
91144 total 49152

2.486852
16.413223
cost of capital 10%

rs pv pvcf
72
45 0.9090909091 40.9090909091
22 0.826446281 18.1818181818
20 0.7513148009 15.026296018
13 0.6830134554 8.8791749197
13 0.6209213231 8.0719771998
13 0.5644739301 7.3381610907
98.4065183192
26.4065183192

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