EPPM3644 KEWANGAN KORPORAT DAN PENSTRUKTURAN
SET: 3
REPORT OF CASE STUDY:
CASE 19 WORLDWIDE PAPER COMPANY
PROFESSOR:
DR. LIZA MARWATI BINTI MOHD YUSOFF
GROUP MEMBERS:
LOH CHAI LING A140178
GOH HOOI SAN A139708
KERK (KEH) YIH JEN A139574
SEMESTER 2, 2013/2014
INTRODUCTION
In December 2006, Bob Prescott, the controller for the Blue Ridge Mill, was considering the addition of a new on-site longwood woodyard. Two primary benefits for this new addition include eliminating the need to purchase shortwood from an outside supplier and creating an opportunity to sell shortwood on the open market. Also, the new woodward would reduce operating costs and increase revenues. Blue Ridge Mill currently purchased*…show more content…*

PROBLEM SOLVINGS First, we need to find the required rate of return (WACC) to calculate the discounted cash inflow so that we can evaluate the longwood woodyard project more accurately. Calculate KE : Cost of Equity (CAMP) KE = KRF + (KM – KRF) Beta Beta = 1.1 KRF= 4.60% : Government bonds 10-year, Risk premium = 6.0% KE = 4.6% + (6.0%) 1.1 = 11.2% Calculate KD: Cost of Debt KD = Bank Loan Payable + Long Term Debt = $ 500 + $ 2500 = $ 3000 KD = (500/3000) * (5.38% + 1%) + (2500/3000) * (5.78%) = 5.88% KD (1-Tax) =5.88% (1-40%) = 3.528% Calculate capital structure: WE and WD Equity = Current Market Share Price x Shares Outstanding = $24 x 500m = $12000m Debt = Bank Loan Payable + Long Term Debt = RM 500 + RM 2500 = RM 3000 E+D = $ 12000 + $ 3000 = $ 15000 WE = 12000/15000 = 0.8/80% WD = 3000/15000 = 0.2/20% Calculate WACC WACC = WE. KE + WD .KD (1-T) = 0.8 (11.2%) + 0.2 (3.528%) = 9.6656 @ 9.67% So. The WACC (required rate of return) is 9.67% Second, we need to find the cash inflow of this project. 2007 2008 2009 2010 2011 2012 2013 $ 'million $ 'million $ 'million $ 'million $ 'million $ 'million $ 'million Revenue 4 10 10 10 10 10 (-) COGS (75% of reveue) 3 7.5 7.5 7.5 7.5 7.5 (-) SG & A (5% of

PROBLEM SOLVINGS First, we need to find the required rate of return (WACC) to calculate the discounted cash inflow so that we can evaluate the longwood woodyard project more accurately. Calculate KE : Cost of Equity (CAMP) KE = KRF + (KM – KRF) Beta Beta = 1.1 KRF= 4.60% : Government bonds 10-year, Risk premium = 6.0% KE = 4.6% + (6.0%) 1.1 = 11.2% Calculate KD: Cost of Debt KD = Bank Loan Payable + Long Term Debt = $ 500 + $ 2500 = $ 3000 KD = (500/3000) * (5.38% + 1%) + (2500/3000) * (5.78%) = 5.88% KD (1-Tax) =5.88% (1-40%) = 3.528% Calculate capital structure: WE and WD Equity = Current Market Share Price x Shares Outstanding = $24 x 500m = $12000m Debt = Bank Loan Payable + Long Term Debt = RM 500 + RM 2500 = RM 3000 E+D = $ 12000 + $ 3000 = $ 15000 WE = 12000/15000 = 0.8/80% WD = 3000/15000 = 0.2/20% Calculate WACC WACC = WE. KE + WD .KD (1-T) = 0.8 (11.2%) + 0.2 (3.528%) = 9.6656 @ 9.67% So. The WACC (required rate of return) is 9.67% Second, we need to find the cash inflow of this project. 2007 2008 2009 2010 2011 2012 2013 $ 'million $ 'million $ 'million $ 'million $ 'million $ 'million $ 'million Revenue 4 10 10 10 10 10 (-) COGS (75% of reveue) 3 7.5 7.5 7.5 7.5 7.5 (-) SG & A (5% of

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