Financing (6 points)

1. Financing (6 points)

Determine the Equity/debt ratio for financing the project and amount of Equity &Debt in overall investment.

Capital expenditure	$ 28 000 000
Net income per year	$ 1 500 000
Loan interest rate (Kd)	10%
Cost of Equity (Ke)	12%
Nondeductible interest for taxes
Loan amount=Net income/WACC
WACC=f(E,D,Ke,Kd)

Solution:

Given data:
Loan amount = Debt = D
Equity = E
Capital expenditure = Total investment = Equity + Debt = E+D= 28 mln $  E = 28 - D
Net income(year) = 1.5 mln $
Nondeductible interest for taxes -> T=0
K_D = 10%
K_E = 12 %


------>>>

By substituting the unknown variable one with another one,

28 * 1.5 = D{(28-D)*0.12 + 0.1*D}

42 = 3.36 D – 0.02 D²
2D² -336D+4200 =0
Discriminant =

D₁ = this solution is not accepted because total investment is 28 mln $, 154 >28 Reject this answer

D₂ = - Right answer

Loan amount = D= 13.5 mln $
Equity = E = 28-13.5 = 14.5 mln$


E/D = 14.5/13.5 = 1.07

Exercise 2. Financing (6 points)

Determine the Equity debt/ratio for financing the project and amount of Equity &Debt in overall investment.

Capital expenditure	$ 20 000 000
Net income per year	$ 1 000 000
Loan interest rate (Kd)	8%
Cost of Equity (Ke)	10%
Deductible interest for taxes	20%
Loan amount=Net income/WACC
WACC=f(E,D,Ke,Kd)

Solution:

Given data:
Loan amount = Debt = D
Equity = E
Capital expenditure = Total investment = Equity + Debt = E+D= 20 mln $  E = 20 - D
Net income(year) = 1 mln $
Nondeductible interest for taxes -> T=20%
K_D = 8%
K_E = 10 %


------>>>









By substituting the unknown variable one with another one,

20 * 1= D{(20-D)*0.1 + 0.08*D*0.8}

20 = D(2-0.1D + 0.064*D)
20 = 2D -0.1 D² + 0.064*D²

0.036D² -2*D+20 =0 (*1000)

Discriminant =

D₁ = this solution is not accepted because total investment is 20 mln $, 42.75 >20 Reject this answer

D₂ = - Right answer

Loan amount = D= 13.08 mln $ 13.08/20 = 65.4 % of total investment
Equity = E = 20-13.08 = 6.92 mln$ 6.92/20 = 34.6% of total investment

E/D = 6.92/13.08 = 0.53

3. Financing (6 points)

Determine the approximate mix of equity and debt sources of fund (debt leverage) required to finance a 10 million € B.O.T. project. The project is supposed to be operated over 10 years, with 1 million € annual expected cash flow (before repayment of debt interest and principal to the bank).
Assume that both cost of equity and cost of debt are 10% and that annual principal is 1/10 of initial debt funds. Feel free to make other reasonable financial assumptions, if required.

Solution:

Total investment = E+D = 10 mln$ -> E=10-D
EBI = 1 mln$
Ke=Kd = 10%
Annual principal = 1/10 *D
Operational years = 10 years
Net income = EBI – (Principal +Interest rate) in case of DSCR = 1 -> EBI = Principal +Interest
Net income = 0
DSCR = 1
DSCR = 1.2 (post taxes) EBI = 1.2 (Principal +Interest) Net income = EBI – (0.1*D +0.1*D)

Net income = EBI -EBI/1.2

Net income = EBI – (1/10*D + 0.1 * D)

=


=
10 (1-0.2D) = D*{(10-D)*0.1 + D*0.1)}
10 -2D=D
10 = 3D D = 10/3 = 3.33 mln $ Equity = 10-3.33 = 6.67 mln $

(10-D)*0.1 + 0.1*D= 0 1-0.1D+0.1D= 0 D= 0

3.