Question

Memorandum to Darth Vader

The Empire is planning to create the first ever Death Star.

Question: Please fill out this table with the given information below:

Each Planet Destroyed
Number of Planet Destroyed per Year
Fixed Cost Per Year
Variable Cost Per Planet
Salvage Value Promised by the Ewoks
Total Depreciation
Initial Purchase of Equipment
Installation
Net Operating Working Capital
Interest Rate to Borrow Capital
Tax Rate
Dividend Amount Per Year
Stock Price
Growth of Stock
Total % Amount of Capital Borrowed
Total % Amount of Capital of Equity

• The equipment costs are around IC 100,000 (where IC is the imperial credit) plus IC 60,000 more for installation.
• In order to operate the Death Star, working capital has to increase by IC 40,000 which will be recovered at the end of the project.
• As the Emperor has foreseen it, the project is expected to last 4 years after which the equipment will be destroyed by the Rebellion. However, some parts of the project will be salvaged and sold for IC 20,000 to the Ewoks. Depreciation is based on straight-line method with zero salvaged value.
• Each planet that Darth Vader destroys costs the empire IC 10,000 but at the same time, it brings in IC 25,000 per planet destroyed from other fearing planets. Each year the empire plans to destroy 10 planets.
• The Death Star is a big-machine and therefore incurs a fixed cost of IC 75,000 to operate each year.
• In order to set an example, the Empire Department of Tax charges a 40% tax rate on the Death Star; however they give a tax shield for borrowing money.
• To finance this project, the Empire will borrow 40% of the initial outlay from the Banking Clan at a pre-tax rate of 12.50%. The other 60% will come by selling equity to the Separatist Group. The selling price per share of the Empire is IC 100 and is expected to grow at the constant rate of 11.67% forever. The next dividend will be of IC 5. The lenders of the capital require high rate of return because this is a risky project and has never been done before.

Answer 1

Each Planet Destroyed	25000
Number of Planet Destroyed per Year	10
Fixed Cost Per Year	75000
Variable Cost Per Planet	10000
Salvage Value Promised by the Ewoks	20000
Total Depreciation	160000
Initial Purchase of Equipment	100000
Installation	60000
Net Operating Working Capital	40000
Interest Rate to Borrow Capital	12.50%
Tax Rate	40%
Dividend Amount Per Year	5
Stock Price	100
Growth of Stock	11.67%
Total % Amount of Capital Borrowed	(100000+60000+40000)*40% = 80000
Total % Amount of Capital of Equity	200000-80000 = 120000