QUESTION 3 YORK Co. Ltd and HERT Plc, are two companies in the electronic car manufacturing...

 

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QUESTION 3 YORK Co. Ltd and HERT Plc, are two companies in the electronic car manufacturing sector. Both companies are listed on a major stock exchange in Asia. At the last meeting of its board of directors, YORK Co. Ltd, decided to acquire all the shares of HERT Plc. The following financial information has been gathered by the Chief Finance Officer, to determine the cost of capital needed for the proposed acquisition of HERT Pic. Ordinary Shares Retained earnings Total Equity YORK Co. Ltd. £ (million) 200 Page 3 of 8 53 253 YORK Co. Ltd has 10 million ordinary shares outstanding. HERT Pic's £72 million shares, were issued at £5 per share. The current 3-month treasury bill rate is 6%. The average return on the market is 15.5%. The price-earnings (P/E) ratio for the electric car manufacturing sector is 10. Applicable corporate tax rate is 25%. HERT Plc. £ (million) 72 35 107 Currently, the shares of YORK Co. Ltd are trading at £7/share. The equity beta of YORK Co. Ltd is 1.3. The company is also financed by a 4-year, 9% annual coupon bonds with a face value of £1000 per bond. The required yield for this bond is 6%. The company sold 5000 units of this bond. continue... 7002EFA HERT Pic's cost of equity is 7%. It has a current earning per share (EPS) of £2. The company has a policy to pay 40% of its annual earnings as dividends to shareholders. Its sustainable growth rate is 3%. Required: QUESTION a) Calculate the total market value of the bonds and the after-tax cost of debt for YORK Co. Ltd. (6 marks) b) Calculate the weighted average cost of capital (WACC) of YORK Co. Ltd on a market value weighted basis. (6 marks) c) Calculate the total value of the target company, HERT Plc, using: i) The Price/Earnings ratio valuation method ii) The Dividend Growth valuation method (4 marks) (4 marks) d) Discuss three ways in which high debt levels could negatively impact a firm's business. (5 mark [Total 25 mar QUESTION 3 YORK Co. Ltd and HERT Plc, are two companies in the electronic car manufacturing sector. Both companies are listed on a major stock exchange in Asia. At the last meeting of its board of directors, YORK Co. Ltd, decided to acquire all the shares of HERT Plc. The following financial information has been gathered by the Chief Finance Officer, to determine the cost of capital needed for the proposed acquisition of HERT Pic. Ordinary Shares Retained earnings Total Equity YORK Co. Ltd. £ (million) 200 Page 3 of 8 53 253 YORK Co. Ltd has 10 million ordinary shares outstanding. HERT Pic's £72 million shares, were issued at £5 per share. The current 3-month treasury bill rate is 6%. The average return on the market is 15.5%. The price-earnings (P/E) ratio for the electric car manufacturing sector is 10. Applicable corporate tax rate is 25%. HERT Plc. £ (million) 72 35 107 Currently, the shares of YORK Co. Ltd are trading at £7/share. The equity beta of YORK Co. Ltd is 1.3. The company is also financed by a 4-year, 9% annual coupon bonds with a face value of £1000 per bond. The required yield for this bond is 6%. The company sold 5000 units of this bond. continue... 7002EFA HERT Pic's cost of equity is 7%. It has a current earning per share (EPS) of £2. The company has a policy to pay 40% of its annual earnings as dividends to shareholders. Its sustainable growth rate is 3%. Required: QUESTION a) Calculate the total market value of the bonds and the after-tax cost of debt for YORK Co. Ltd. (6 marks) b) Calculate the weighted average cost of capital (WACC) of YORK Co. Ltd on a market value weighted basis. (6 marks) c) Calculate the total value of the target company, HERT Plc, using: i) The Price/Earnings ratio valuation method ii) The Dividend Growth valuation method (4 marks) (4 marks) d) Discuss three ways in which high debt levels could negatively impact a firm's business. (5 mark [Total 25 mar

Answer rating: 100% (QA)

Required Calculate the total market value of the bonds and the aftertax cost of debt for YORK Co Ltd The total market value of the bonds is 500000 The ... View the full answer