Orange, Inc. is a manufacturer of smart phones and is considering a project to manufacture electric cars, a market that is dominated by Alset, Inc., which has a weighted average cost of capital of 15%. The only debt Orange, Inc. has outstanding is 500,000 of 20-year bonds that were issued 10 years ago. These 10% semi-annual coupon bonds are currently trading at 90% of their $1,000 face value. In addition, Orange, Inc. has 4.4 million ordinary shares outstanding with a beta of 1.30 and selling at $125 each. The expected return on the market is 10.2% and the risk-free rate of return is 1.2%. The marginal corporate tax rate is 15%.

(a) Calculate Orange, Inc.’s cost of equity. 

(b) Calculate Orange, Inc.’s cost of debt. 

(c) Calculate Orange, Inc.’s weighted average cost of capital and decide on a discount rate to be used by Orange Inc. to assess its electric car manufacturing project. Specify two (2) important considerations in making your decision. 

(d) A credible newspaper reports that the chief executive officer of Orange Inc. has been diagnosed with terminal cancer. How will this affect its cost of equity? 

(e) Orange, Inc. plans to issue some preferred shares and use the proceeds to repurchase some of its ordinary shares. How will this affect its WACC? 

Answer rating: 100% (QA)

a The cost of equity for Orange Inc ... View the full answer