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Free «Corporate Finance» Essay Sample

Right price is calculated as:

(Old price - subscription price) / (number of rights per new share + 1)

In this case

Old price = USD 32

Subscription price = USD 23                   

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Number of rights per new share = 5

Therefore price per right = (32 – 23)/(5+1)

                                   = 9/6

Right price                  =USD 1.5

WACC = (E/V) Re+ (D/V) Rd*(1-tax rate)

Re= Rf + Beta (Rm – Rf) but Rm – Rf = market risk premium

Therefore, Re=Rf + Beta (market risk premium)

                        =3+ (1.3*9)

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                        =14.7

Equity market, E = 5,000,000 *2.40

                                   = USD 12000000

Debt market rate =USD 10,000,000

Firm market value, V =E+D

                                   =12,000,000+10,000,000

                                   =USD 22,000,000

 
 
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Cost of debt = 6%

Therefore WACC = (12000000/22000000)*14.7 + (10000000/22000000)*0.06*(1 - 0.28)

                                   =8.206%

I would suggest the company uses an internal discount rate which is less than 8.206% to prevent risks of losses

NPV for the Germany project

 

NPV = -500+ ((200)/ (1+0.08) ^1) + ((200)/ (1+0.08) ^2) + ((300)/ (1+0.08) ^3

            =-500+185.19+171.47+238.1

            94.76

NPV for the Turkey project

NPV = -500 + ((250)/ (1+0.08) ^1) + ((250)/ (1+0.08) ^2) + ((250)/ (1+0.08) ^3

            =-500 + 231.48 + 147.06 + 198.41

            =76.95

I would advice them to take the project in Germany. This is because it has a higher Net Present value.

   

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