Estimate wacc for the project

Assignment Help Financial Management

Reference no: EM131919805

Wolverine Corp. currently has no existing business in New Zealand but is considering establishing a subsidiary there. The following information has been gathered to assess this project:

The initial investment required is 50 million in NZDs (NZD). Given the existing spot rate of USD .50 per NZD, the initial investment in USDs is USD 25 million. The project will be terminated in 3 years.

Wolverine plans to finance the new investment by borrowing NZD 2 million from the local market. The New Zealand subsidiary will pay 5% percent. The loan will be fully paid in 3 years. Assume that the NZ subsidiary do not need any additional working capital.

Assuming integrated capital market, the risk free rate in the US is 4%, the equity risk premium is 5% and beta of the project is 0.95. The equity financing is 60% and debt financing is 40% for the project.

The project will be terminated at the end of Year 3, when the subsidiary will be sold. Wolverine expects to receive NZD 52 million. Assume that this amount is not subject to a withholding tax.

The price, demand, and variable cost of the product in New Zealand are as follows:

Year Price Demand Variable Cost

1 NZD 500 40,000 units NZD 30

2 NZD 511 50,000 units NZD 35

3 NZD 530 60,000 units NZD 40

The fixed costs, such as overhead expenses, are estimated to be NZD 6 million per year.

The exchange rate of the NZD is expected to be USD .52 at the end of Year 1 USD .54 at the end of Year 2 and USD .56 at the end of Year 3.

The New Zealand government will impose an income tax of 20 % on income. The US corporate income tax is 35 %. Any cash flow sent by the subsidiary is subject to 5% withholding tax.

All cash flows received by the subsidiary are to be sent to the parent at the end of each year. The subsidiary will use its working capital to support ongoing operations.

The plant and equipment are NZD 6,000,000 and depreciated over 3 years using the straight-line depreciation method.

a) Estimate WACC for the project.

b) Calculate the NPV & IRR from the perspective of the subsidiary.

c) Calculate the NPV & IRR from the perspective of the parent.

d) Should Wolverine Corp accept this project? If not explain what could the parent company do?

Reference no: EM131919805

Questions Cloud

Assume that payment over period is steady : The city has total cash payments of $15 million (T) for a 6-month period. Assume that the payment over this period is steady.

Discuss the types of economic evaluations : The director of the healthcare facility where you work has just received notice from the Ministry of Health (MOH) that they will be conducting economic.

How a company would implement each components of technology : Describe how a company would implement each of these components of technology. Explain the purpose and how it would be utilized within the company.

Identify a training program that will address the needs : What preliminary information would you gather before conducting the needs assessment? Provide a rationale for your decision.

Estimate wacc for the project : Estimate WACC for the project. Calculate the NPV & IRR from the perspective of the subsidiary.

Can such a blind leap be a good thing for the business : Why do you think managers, or business decision makers, get caught up in following the crowd versus making decisions that are truly going to add value.

Evaluate accreditation from aspect of involved stakeholders : Efficiency and effectiveness is essential to control costs and quality in healthcare organizations. Research global and national accreditation bodies working.

How would prison sentencing or the death penalty be affected : If people accepted that all evil is ignorance, what implication would that have on justice system? How would prison sentencing or the death penalty be affected?

Calculate NPV and IRR with mitigation : An electric utility is considering a new power plant in northern Arizona. Calculate the NPV and IRR with mitigation.

User Account

All Pages