Suppose you derived the following information on the Private Cash Flow of a project: Year 0 1 2 3 4 5 6 Market Cash Flow -5200 1500 1500 1500 1500 1500 1500 Debt Financing 3200 -900 -900 -900 -900 -900 -900 Private Net Flow -2000 600 600 600 600 600 600 If the debt-to-equity ratio is 60:40; calculate: The IRR on the Market [a] The IRR on the Debt [b] The IRR on the Equity [c
Question
Suppose you derived the following information on the Private Cash Flow of a project:
Year
0
1
2
3
4
5
6
Market Cash Flow
-5200
1500
1500
1500
1500
1500
1500
Debt Financing
3200
-900
-900
-900
-900
-900
-900
Private Net Flow
-2000
600
600
600
600
600
600
If the debt-to-equity ratio is 60:40; calculate:
The IRR on the Market [a] The IRR on the Debt [b] The IRR on the Equity [c
Solution
[a] IRR on the Market
The IRR (Internal Rate of Return) on the market can be calculated by setting the Net Present Value (NPV) of the market cash flows to zero and solving for the discount rate. This can be done using a financial calculator or a software like Excel.
In Excel, you can use the IRR function. The cash flows for the market are as follows: -5200, 1500, 1500, 1500, 1500, 1500, 1500. The IRR on the market can be calculated as follows:
=IRR([-5200,1500,1500,1500,1500,1500,1500])
[b] IRR on the Debt
The IRR on the debt can be calculated in a similar way. The cash flows for the debt are as follows: 3200, -900, -900, -900, -900, -900, -900. The IRR on the debt can be calculated as follows:
=IRR([3200,-900,-900,-900,-900,-900,-900])
[c] IRR on the Equity
The IRR on the equity can be calculated by subtracting the debt cash flows from the market cash flows to get the equity cash flows. The equity cash flows are as follows: -2000, 600, 600, 600, 600, 600, 600. The IRR on the equity can be calculated as follows:
=IRR([-2000,600,600,600,600,600,600])
Please note that the actual IRR values will depend on the specific financial calculator or software you are using. The above steps are a general guide on how to calculate the IRR for the market, debt, and equity.
Similar Questions
Consider a project with the following annual cash flows: -$100 (at t=0) and $300 (at t=5). What is the IRR of this project?[Answer: Percentage number. If the answer is 12.34% write either 12.34 (number with 2 decimals) or 0.1234 (number with 4 decimals). Do not include ‘%’.]
What is the IRR of the following set of cash flows? Year Cash Flow0 –$9,503 1 4,300 2 5,500 3 3,900 Multiple Choice22.11%21.06%20.01%20.64%21.48%
Filter Corporation has a project available with the following cash flows:Year Cash Flow0 −$16,2001 5,6002 6,9003 6,3004 4,700 What is the project's IRR?
IRRAn FMCG business plans to onboard a new distributor.The outward cash flows of the business towards onboarding the distributor would be as follows:Year 0 1 2 3 4 5 6Outflow (₹ lakh) 30 20 10 10 10 10 10The cash inflow in the form of additional contribution through the sale of goods by the distributor is as follows:Year 0 1 2 3 4 5 6Inflow (₹ lakh) 05 30 15 20 20 25 25Where relevant, assume the WACC of the business at 14%.Calculate the IRR attributable to the addition of the new distributor.31%25%28%35%
Using the financial statements below, calculate the debt to equity ratio for the current year. Please calculate to 2 decimal places.Profit and loss statement Current year Prior yearRevenue 14,800 18,500Less Cost of sales 6,000 7,500Gross profit 8,800 11,000Less expenses Wages Expense 5,500 6,500Interest Expense 2,200 2,000Depreciation Expense 1,000 1,200Advertising Expense 900 800Net profit (800) 500BALANCE SHEET Current year Prior yearCurrent assets Cash 14,250 16,700Accounts Receivable 14,000 3,500Inventory 6,000 2,500Prepaid Expenses 650 1,500Non-current assetsProperty Plant Equipment 192,500 193,500Land 210,000 210,000Total assets 437,400 427,700Current liabilitiesAccounts Payable 11,700 4,200Unearned Revenue 3,500 2,000Wages Payable 3,500 2,500Non-current liabilitiesBank Loan 118,000 122,500Total liabilities 136,700 131,200NET ASSETS 300,700 296,500Equity Share Capital 255,000 250,000Retained Earnings 45,700 46,500TOTAL EQUITY 300,700 296,500
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.