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Isa Al-Khaja

201100190

Ali Sarhan

201101119

Layla Kashtakar

201100852

Ghadeer Hujair

20091684

The Three Issuing Opportunities


Issuing Bonds
Issuing Preferred Shares
Issuing Common Stock

Cost of Issuing Bonds


Par Value = $ 1000
Maturity = 20 years
Coupon = 8% * 1000 = $ 80
Associated Costs = 10 + 5 + 12 + 5 = $ 32
Discounted Par Value = 1000 32 = $ 968

Cost of Issuing Bonds


968

8
0

1000+80=1080

Year

Coupon + Par Value

-968

80

80

80

80

80

80

80

80

80

10

80

11

80

12

80

13

80

14

80

15

80

16

80

17

80

18

80

19

80

20

1080

IRR (Cost of the


Bond)

8.33407%

Par Value

1000

Cost of Issuing Bonds

8.33407 %

Cost of Issuing
Preferred Shares
D1
PS
(P0
)
CPS= 10% * 90
(90 7.5)

C =

Cost of Issuing
Preferred Shares
D1
PS
(P0
)
CPS= 9
(90 7.5)

C =

Cost of Issuing
Preferred Shares

10.90909 %

Cost of Issuing
Common Stock

C =
CS

C =
CS

D1
+g
P0 (1 %)

2.75
+ 2.5%
35(1 6%)

Cost of Issuing
Common Stock

10.86 %

Cost of Issuing Bonds


Cost of Issuing
Common Stock
Cost of Issuing
Preferred Shares

8.33407 %
10.86 %

10.90909 %

The Best Economical


Issuing Combination
The internal company rules:
The funds must only be taken from the
3 issuing opportunities.
25% of the equity must derive from common stock
and 75% from preferred stock.
No more than 80% of the entire $45,000,000 can
come through debt issuance

The Best Economical


Issuing Combination
The internal company rules:
At least 35% of the entire $45,000,000 must come
from equity issuance.
Debt must not make more than 60% of the new
capital structure.
Debt must make at least 40% of the new capital
structure

The Best Economical


Issuing Combination

$15,750,000

$ 29,250,000
Bonds
Shares

The Best Economical


Issuing Combination

$ 3,937,500
$15,750,000

$ 11,812,500
Preferred
Shares
Common Stock

$ 29,250,000
Bonds

Shares

The Capital Structure


Old Capital Structure
$ 62500000

Debt

40%

$ 25,000,000

Equity

60%

$ 37,500,000

The Capital Structure


Final Capital Structure with the Most Economical Choice
$ 107,500,000

Debt

50.4651%

$ 54,250,000

Equity

49.5349%

$ 53,250,000

WACC
WACC = (C B* PropB)(1-T) + (C P * PropsPS ) + (CC * PropCS )
S

Bond
Preferred
Share
common
Share

WACC

Amount

Proportion

Cost

Tax Deduction

29250000

65.00%

25%

11812500

26.25%

8.33407136%
10.90909010
%

3937500

8.75%

10.86%

7.8767%

Pre tax
Post tax
5.4171463842675 4.0629
%
%
2.863636%
0.9502500%

WACC

7.8767%

Free Cash Flows


FCF 2013-2017
FCF 2018
FCF 2017+2018

1.

Results of OCF 2013-2017

2.

Results of NFAI 2013 - 2017


year
2013
2014
2015
2016
2017

NFAI
$ 420,000.00
$ 630,000.00
$ 950,000.00
$ 660,000.00
$ 1,090,000.00

3.

Results of NCAI 2013 - 2017


Year
2013
2014
2015
2016
2017

NCAI
0
0
$ (200,000.00)
$ 400,000.00
$ 50,000.00

Results of FCF 2013 - 2017

FCF 2018

FC1 = $ 5,096,000
G = 4% (0.04)
N=1

FC1 = $ 5,299,840

CF1 = $ 5,299,840
WACC = 7.8767%
G = 4% (0.04)

CFO = 2%
CEO = 4%

Chairman = 6%

Results of FCF 2018

Risk premuim
Total WACC
FCF 2018

CFO
CEO
Chairman
2%
4%
6%
9.8767%
11.8767%
13.8767%
$ 90,183,241.79 $ 67,284,638.11 $ 53,659,778.56

FCF 2017+2018
Excel error
Solution:
Risk Premium

2%

4%

6%

Total WACC

9.8767 %

11.8767 %

13.8767 %

FCF 2018

$ 90,183,241.79

$ 67,284,638.11

$ 53,659,778.56

FCF 2017+2018

$ 95,279,241.79

$ 72,380,638.11

$ 58,755,778.56

Internal Rate of
Return(IRR)
Maximum level of cost
IRR VS Total WACC

Net Present Value (NPV)


The expected profit
The initial cost- (Discounted FCF)

Fair Value
True value of the company.

Initial cost VS Fair value

Sum on Discounted Cash flows

1 +

Figures relationships

IRR

NPV

UNDER
VALUED

What does all this means?

IRR

NPV

OVER VALUED

Results

Sestel software under


the CFO suggestion
2% risk premium>> 9.8767% total WACC

initial cost
FCF 2013
FCF 2014
FCF 2015
FCF 2016
FCF 2017+2018
IRR
NPV
Fair evalution

FCF
PV
$ (45,000,000.00)
$ 1,330,000.00
1,210,448.49
$ 1,104,000.00
914,446.75
$ 1,608,000.00
1,212,188.23
$ 3,514,000.00
2,410,906.94
$ 95,281,034.35 59,494,911.97
18.7388%
$20,242,902.37
65,242,902

Sestel software under


the CEO suggestion
4% risk premium>> 11.8767% total WACC
initial cost
FCF 2013
FCF 2014
FCF 2015
FCF 2016
FCF 2017+2018
IRR
NPV
Fair Value

FCF
$ (45,000,000.00)
$ 1,330,000.00
$ 1,104,000.00
$ 1,608,000.00
$ 3,514,000.00
$ 72,381,635.93
12.78572%
$1,760,503.20

PV
$ 1,188,809.50
$
882,044.16
$ 1,148,333.22
$ 2,243,077.44
$ 41,298,238.88

$ 46,760,503.20

Sestel software under


the Chairman
suggestion
6% risk premium>> 13.8767% total WACC
`
initial cost
FCF 2013
FCF 2014
FCF 2015
FCF 2016
FCF 2017+2018
IRR
NPV
Fair Value

FCF
$ (45,000,000.00)
$ 1,330,000.00
$ 1,104,000.00
$ 1,608,000.00
$ 3,514,000.00
$ 58,756,413.18
8.5173%
($9,120,348.42)

PV
$ 1,167,930.60
$ 851,333.78
$ 1,088,885.55
$ 2,089,600.89
$ 30,681,900.75

$ 35,879,651.58

2% Risk Premium
IRR
18.7384%

WACC
9.87670%

NPV= about 20,000,00


4% Risk Premium

IRR

WACC

12.78543%

9.87670%

NPV
1,759,702.24

6% Risk Premium
IRR
8.5171%

WACC
13.8767%

NPV
(-$9,120,852.04)

Any questions?