Merasal SAOG has been running three types of related business. The beta estimation and the approximate size of capital invested in each of the three-business type are given to you below. Business Type Beta Total Market Value of the Capital invested (OMR millions) A 1.8 255 B 0.7 345 C 0.3 525 The treasury bill rate of the country stands at 3%. The tax rate is 25%. The average cost of debt of the company is 6% before any tax adjustments. Market Value of the equity is OMR 1800 m debt is OMR 1200m. The company is planning to invest OMR 1200 million in a project. The project is in line with the current operation and involves all thee business activities approximately in the same business combination. The following cashflow estimation is made by the team appointed for project appraisal. Year 1 2 3 4 5 Cash Flow (OMR millions) 300 350 200 300 350 You have been appointed as a consultant to advise the company and your main role is to assist the team to make appropriate project decision. You are required to; Calculate the weighted average cost of capital suitable to evaluate the project Calculate NPV for the project and provide an expert advice whether the company should proceed with this project What are the limitations of the above analysis?

SWFT Essntl Tax Individ/Bus Entities 2020

23rd Edition

ISBN:9780357391266

Author:Nellen

Publisher:Nellen

Chapter3: Taxes On The Financial Statements

Section: Chapter Questions

Problem 5RP

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Merasal SAOG has been running three types of related business. The beta estimation and the approximate size of capital invested in each of the three-business type are given to you below.

Business Type	Beta	Total Market Value of the Capital invested (OMR millions)
A	1.8	255
B	0.7	345
C	0.3	525

The treasury bill rate of the country stands at 3%. The tax rate is 25%. The average cost of debt of the company is 6% before any tax adjustments. Market Value of the equity is OMR 1800 m debt is OMR 1200m.

The company is planning to invest OMR 1200 million in a project. The project is in line with the current operation and involves all thee business activities approximately in the same business combination. The following cashflow estimation is made by the team appointed for project appraisal.

Year	1	2	3	4	5
Cash Flow (OMR millions)	300	350	200	300	350

You have been appointed as a consultant to advise the company and your main role is to assist the team to make appropriate project decision. You are required to;

Calculate the weighted average cost of capital suitable to evaluate the project
Calculate NPV for the project and provide an expert advice whether the company should proceed with this project
What are the limitations of the above analysis?

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