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    Finance and Capital Structure

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    yfarhana2002

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    Finance and Capital Structure

    Uploaded by

    yfarhana2002
    26 views8 pages

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    Download as xlsx, pdf, or txt
    26 views8 pages

    Finance and Capital Structure

    Uploaded by

    yfarhana2002

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    You are on page 1of 8

    13.1 (a) WACC = Ke*(E/E+D+B) + Kd(1-t)*(D/E+D+B)+Kb(1-t)*(B/E+D+B) 4.

    89%

    Ke 0.056
    Kd(1-t) 3.16%
    Kb(1-t) 3.32%
    E 6430.8
    D 2052
    B 635
    E+D+B 9117.8

    E Working:
    No. of shares 2330
    Ex div price 2.76
    MV of E 6430.8

    D Working:
    MV of Debt 2052

    B Working:
    MV of Bank Loan 635

    Ke using CAPM:
    Ke = Rf + be(Rm-Rf)
    Ke = 2%+0.60(8%-2%)
    Ke =5.60%

    Kd(1-t) Working:
    Year 0 1 2 3 4
    CF -108 6 6 6 106
    IRR 3.81%
    Kd(1-t) 3.16%

    Kb(1-T) Working:
    Kb(1-t) 3.32%

    (b) Div Yield =Dividend/Share Price


    Dividend = Div Yield x Share Price
    Dividend = 11.592
    Payout Ratio 0.46368
    Retention Rate 0.53632
    Net Profit 582.5
    ARR 11.77%
    Growth 6.31%
    Ke using Gordon Growth Model:
    Ke 10.78%

    Kd(1-t) 3.16%
    Kb(1-t) 3.32%
    E 6431
    D 2052
    B 635
    E+D+B 9117.8

    WACC 8.54%

    13.2 The cost of equity should be adjusted to reflect the systematic risk of the new project.
    The beta factor should be adjusted for gearing.
    Asset Beta = 0.93457944
    Regear the Asset Beta to reflect Turner's Equity Beta
    Vd 2687
    Vd(1-T) 2230.21
    Ve 6431
    Ve+Vd(1-t) 8661
    Ve+Vd(1-t)/Ve 1.34680133
    Equity Beta 1.25869283
    Rf 0.02
    Rm 0.08
    Using CAPM, Ke 9.55%

    With regard to WACC to be used for the project, the discount rate should reflect
    systematic risk of the project and financial risk of the company.

    13.3 Overall Equity beta 0.66587


    Using CAPM, Ke 5.995%
    The WACC of the enlarged group will be: 5.17%

    Kd(1-t) 0.031591
    Kb(1-t) 0.0332
    E 6430.8
    D 2052
    B 635
    E+D+B 9117.8

    E/E+D+B 0.70530172
    D/E+D+B 0.22505429
    B/E+D+B 0.06964399
    The implications of a parmanent change in the company's WACC from 4.88% to 5.17% are less clear.
    An increase in the WACC is usually associated with reductions in value, on the other hand
    assuming that the new project has a positive net present value, this could result in an increase in market capitalisati
    13.4 The diversification plans may not be welcomed by the market. Portfolio theory tells us that rational shareholders
    would hold a well-diversified portfolio and that they might not welcome the company diversifying. Conglomerate c
    13.5 If the gearing changes dramatically, then it is not suitable to use WACC/NPV to appraise the project. Instead APV sh
    The discount rate will be that of an all equity company using the asset beta of 0.93 to reflect the systematic risk.
    The discount rate 7.58%
    This will be used to calculate the base case NPV. This will then be adjusted for the benefits and costs of the actual w
    17% are less clear.

    an increase in market capitalisation.


    s us that rational shareholders
    any diversifying. Conglomerate companies often trade at a discount.
    praise the project. Instead APV should be used.
    to reflect the systematic risk.

    benefits and costs of the actual way that the project has been financed.
    14.1 WACC = Ke*(E/E+D+P) + Kd(1-t)*(D/E+D+P) + Kp*(P/E+D+P) 16.74%

    Ke 19.25%
    Kd(1-t) 5.47%
    Kp 12.5%
    E 8000
    D 1575
    P 560
    E+D+P 10135

    Using Dividend Growth Model,


    Div Payout Ratio at 31 March 20W9: 40%
    Payout Ratio = Dividend per share/EPS
    Dividend per share 0.14
    No. of shares 6400
    Dividend paid at 31 March 20W9 896
    Dividend paid at 31 March 20x3 1088
    Growth 5%
    Ex Div Share Price 1.25
    Ke = [Do(1+g)/Po] + g
    Do(1+g) = 0.178455173469748
    Ke = 19.25%

    Kd(1-t) working:
    Year 0 1 2 3 4
    CF -105 7 7 7 7
    IRR 6.59%
    Kd(1-t) 5.47%

    Kp Working:
    No. of irredemable pref shares 2800
    Pref Div per share 0.025
    Kp 12.5%
    5 6 7 8 9 10 11 12 13 14
    7 7 7 7 7 7 7 7 7 7
    15 16 17 18 19 20 21 22 23 24
    7 7 7 7 7 7 7 7 7 7
    25
    107

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