ABC Ltd has decided to use the weighted average cost of capital (WACC) to discount the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
ABC Ltd has decided to use the weighted average cost of capital (WACC) to discount the after-tax cash flows associated with project evaluation. You have been given the task of determining the after-tax WACC of the firm. You are informed that ABC Ltd uses the following securities to fund its operation: • 30,000 individual bonds with 7%, 10-year $1,000 face value that were issued 2 years ago have 8 years remaining and offer a coupon that is paid half-yearly. The current market interest rate for these bonds is 5% per annum. 2,000,000 ordinary shares, which recently paid a dividend of 50 cents. Dividends are expected to grow at 4% per annum perpetually. The current share price is $20. Using the historical data, the covariance between the returns of ABC Ltd and the returns of S&P/ASX200 is found to be 0.0025 and the standard deviation of S&P/ASX 200 returns is 0.0458. The risk-free rate is currently 1.65% per annum, and the market risk premium is 6% per annum. For the cost of equity calculation, ABC Ltd has decided to use the average of two values obtained from the constant growth model and the CAPM. 1,000,000 preference shares, which pay an annual dividend of 50 cents. Each preference share trades at a market price of $8. The company tax rate is 30%. Required: a) Compute the WACC. b) Your company is considering an acquisition of Sun Ltd whose WACC is 10%. Your company's purchase of Sun Ltd will cost 100 million, and will generate cash flows that start at $9 million in Year 1 and then grow at 3% per year forever. The cost of environmental clean-up is expected to be $300,000 per year starting from Year 5 in perpetuity. What is the NPV of the acquisition? ABC Ltd has decided to use the weighted average cost of capital (WACC) to discount the after-tax cash flows associated with project evaluation. You have been given the task of determining the after-tax WACC of the firm. You are informed that ABC Ltd uses the following securities to fund its operation: • 30,000 individual bonds with 7%, 10-year $1,000 face value that were issued 2 years ago have 8 years remaining and offer a coupon that is paid half-yearly. The current market interest rate for these bonds is 5% per annum. 2,000,000 ordinary shares, which recently paid a dividend of 50 cents. Dividends are expected to grow at 4% per annum perpetually. The current share price is $20. Using the historical data, the covariance between the returns of ABC Ltd and the returns of S&P/ASX200 is found to be 0.0025 and the standard deviation of S&P/ASX 200 returns is 0.0458. The risk-free rate is currently 1.65% per annum, and the market risk premium is 6% per annum. For the cost of equity calculation, ABC Ltd has decided to use the average of two values obtained from the constant growth model and the CAPM. 1,000,000 preference shares, which pay an annual dividend of 50 cents. Each preference share trades at a market price of $8. The company tax rate is 30%. Required: a) Compute the WACC. b) Your company is considering an acquisition of Sun Ltd whose WACC is 10%. Your company's purchase of Sun Ltd will cost 100 million, and will generate cash flows that start at $9 million in Year 1 and then grow at 3% per year forever. The cost of environmental clean-up is expected to be $300,000 per year starting from Year 5 in perpetuity. What is the NPV of the acquisition?
Expert Answer:
Answer rating: 100% (QA)
In order to compute the weighted average cost of capital WACC we need to find the cost of debt the cost of equity and the cost of preferred shares for ABC Ltd as well as the proportional weights for e... View the full answer
Related Book For
Intermediate Financial Management
ISBN: 9780357516669
14th Edition
Authors: Eugene F Brigham, Phillip R Daves
Posted Date:
Students also viewed these finance questions
-
Your team of four people form a financial analysis team at Aussie Finance Consulting (AFC), a renowned financial institution. The executive management of AFC has assigned you a task to carry out a...
-
You are required to study the information provided below concerning a Namibian listed company called Deep Yellow Limited, that operates in the mining industry. You should compile a report based on...
-
Ann Carter, Chief Financial Officer of Consolidated Electric Company (Con El), must make a recommendation to Con Els board of directors regarding the firms dividend policy. Con El owns two...
-
Assume that a company is going to invest 900,000 USD in a new project. We expect that the invested capital in the fixed assets will be fully depreciated within 3 years in a linear way. The project is...
-
Recording Journal Entries BMW Group, headquartered in Munich, Germany, manufactures several automotive brands including BMW Group, MINI, and Rolls-Royce. Financial information is reported in the euro...
-
A 0.2-kg particle P is constrained to move along the vertical-plane circular slot of radius r = 0.5 m and is confined to the slot of arm OA, which rotates about a horizontal axis through O with a...
-
1. Why do you think employers monitor their online behavior at work? 2. Name the policies the company has put in place in regard to ethics in the workplace. 3. What monitoring technologies does the...
-
Hart Computer Company has been purchasing carrying cases for its portable computers at a delivered cost of $68 per unit. The company, which is currently operating below full capacity, charges factory...
-
Cullumber Service Company charges $205 per hour for labor and has a 20% material loading charge. A recent job required 4 hours and $225 of materials. Calculate the total cost of the job.
-
Part 3 - Coding Exercise: Decoding a Message from a Text File In this exercise, you will develop a function named `decode(message_file)`. This function should read an encoded message from a .txt file...
-
Explain two sources of finance that PU can use to develop the prototype equipment into a commercial product using AI that enables improvement in the ability to detect and identify contamination.
-
Assume the marketing team for Earth's Own is looking to introduce a new flavor to their product line, list two methods method of Primary research and one method of Secondary research that they could...
-
a. Describe the nature of elasticity of demand for Earth's Own Oat Milk. Do you think the product's demand is elastic or inelastic? Briefly explain your reasoning. b. Which pricing method do you...
-
List the three (3) types of retailers selling Earth's Own Oat Milk and describe one (1) benefit this type of retailer provides. Type of Retailer Benefit Description for Earth's Own
-
Look at the Wag! website and determine the 4Ps of this service. Do they work well together? Why or why not
-
Identify the specific elements of your promotion mix including public relations, advertisements, online marketing, direct marketing, and word of mouth. Explain how these will be integrated and who...
-
Fabco Ltd had the following data for months 1 & 2 respectively: 1. Cost of input to process - $65,000 2. Input units = 1,500 & normal loss is 12% 3. Output for month 1 was 1,300 units The data...
-
Write a declaration for each of the following: a. A line that extends from point (60, 100) to point (30, 90) b. A rectangle that is 20 pixels wide, 100 pixels high, and has its upper-left corner at...
-
Schwarzentraub Corporations expected free cash flow for the year is $500,000; in the future, free cash flow is expected to grow at a rate of 8%. The company currently has no debt, and its cost of...
-
Rhodes Corporations financial statements are shown after part f. Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions. a. What is the net operating profit after...
-
The Jimenez Corporations forecasted 2022 financial statements follow, along with some industry average ratios. Calculate Jimenezs 2022 forecasted ratios, compare them with the industry average data,...
-
This exercise considers the data described in the Section 13.2.2 ratemaking classification example using data in Table 13.3 Table 13.3 . a. Fit a gamma regression model using a log-link function with...
-
This exercise considers data from the Medical Expenditure Panel Survey (MEPS) described in Exercise 1.1 and Section 11.4. Our dependent variable consists of the number of outpatient (COUNTOP) visits....
-
Verify that the Tweedie distribution is a member of the linear exponential family of distributions by checking equation (13.9). In particular, provide an expression for \(S(y, \phi)\) (note that...
Study smarter with the SolutionInn App