PROJECT FINANCE-worksheet

PROJECT FINANCE: THEORY AND PRACTICE
WORKSHEET
QUESTIONS
1. EVA ppt I have sent you are included within this worksheet please
*the 8 questions *
2. Discuss projects finance sources on the basis of time, ownership
and control and sources of generation?
3. The following information obtained from East Africa Holdings
financial data base. At the end of 2016 the company free cash flow is
$40 million. And this will continue for unlimited period of time with
zero growth rates. At this time the company capital source was the
existing common stock holders. The unleveraged beta of the
industry is 1.20. But with deep analysis of the industry the finance
sub team convinced the requirement of outside source to sustain a
business. Therefore if the company determines to procure capital
from debt and to leverage the industry what is the optimum capital
structure of the industry? given:
 The experts projected cost of debt is 9%.
 Stock free risk rate of the industry was 7% and the market
risk premium considered was 5%.
 marginal tax is 40%
Hit: consider 40/60 and 50/50 percent debt /equity ratio as possible
optimum capital structure options.
4. In optimal capital allocation process the company capital budgeting

is the most determinate factor. Leveraged company always
considers capital structure that would produce list weighted
average cost of capital. Therefore the Meta Beer Factory manager
detriment to source it capital in the following manner. 54% from
Debt, 34 percent from Preferred stock and 12 percent from common
stock (retained earnings). Addition to retained earnings at the end
of last year was $ 124 million. The company is well structured one
and he can access preferred stock from a company paid dividend at
a price of 12 per share and now selling at open market at $93.00.
The company borrowed new debt with 12% interest rate. The
marginal tax prevalent is 40%. Besides this the company
determines to reinvest dividend from existing shareholders. This
stock risk free return is 8% and expected return is 14%. This family
of common stock has significant risk level is 0.65. The company
considers market risk to value common stock price. Considering all
relevant factors: What is the weighted average cost of capital?
5. This Meta Beer factory produces beer to different group of

customers. They have developed a new beer project called ZEMEN
considering market risk posed by Heineken, which claims to provide
product with additional test. The marketing department has
estimated sales to be 35 million bottles a year at a price of $3 per
bottle. Research and development costs have already amounted to
$400,000. The new product can be produced from the existing
plants, but new machinery is required costing $5 million in each of
five plants in the year 2006. Production and sales would begin in
2007. Advertising and promotion costs in the first year are
estimated at 10 per cent of sales revenues, going down to 5 percent
in later years, with the product having a life of four years. Variable
production costs are estimated at 30 per cent of sales revenues,
with fixed overhead costs being $4 million per year, excluding
depreciation. Besides this the following occurrences affected the
incremental cost and revenue of industry.
 Meta Beer factory may be currently producing a similar
product, Meta X, and net cash inflows from this product may
be reduced by $3.5 million for the first two years of the
project.
 Meta Beer factory have inventories on hand of 10 per cent of
the estimated cost of sales (cost of goods sold or total
variable cost incurred to produce items totally sold) at the
beginning of 2007.
 Due to inflation Assume that variable costs, overheads and
prices all increase by 2 per cent per year (in 2008 and 2009).
 Tax margin was 40%
 Deprecation of plants and equipments is 25% per year.
Therefore
 Considering assumptions above Estimate each year cash flow
from the operation.
 Considering the following points identify the total cash outlay.
o Consider WACC you produced above on question No.3 do
you accept or reject the new project (use NPV, NCBR and
IRR method to evaluate the new project-launching Zemen)

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PROJECT FINANCE: THEORY AND PRACTICE

4. In optimal capital allocation process the company capital budgeting

5. This Meta Beer factory produces beer to different group of

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