CT Corp Comprehensive Question. December $31,2021.$

Canadian Tire Corporation, Limited $($Canadian Tire$)$ is a family of companies that includes a retail segment and a financial services division, among others. The retail business is led by Canadian Tire, which was founded in $1922$ and provides Canadians with products for life in Canada across its Living, Playing, Fixing, Automotive and Seasonal categories.

As noted in the Annual Report, the company was involved in a number of strategic initiatives in $2021,$ including:

$1.$ Leading$-$edge technology initiatives such as their o Innovation centre in Waterloo,

$$ Cloud computing centre in Winnipeg, and

$$ Mobile wallet project.

$2.$ They have also made significant investments $($and will continue to do so$)$ in productivity initiatives, streamlining the organizational structure and making a number of bold strategic marketing moves across each of our brands

In all the company spent $$404\mathrm{.}0$ million in $2021$ on these initiatives. These initiatives required a multi$-$year commitment on the part of the Board of Directors as well as the senior management of Canadian Tire. As a result, the company plans to spend the same amount in $2022$ on special projects.

The company issued $2\mathrm{.}6$ million bonds, with a face value of $$1,000$ each. The bonds have a coupon rate of $10\mathrm{.}0\%,$ were issued at par and are payable semi$-$annually. The bonds have a $25$ year maturity and were issued six years ago. The superior credit ratings being associated with the company have had a positive effect on the Yield$-$to$-$Maturity rates for Canadian Tire's debt. A $$1,000$ Canadian Tire bond has a nominal yield to maturity of $6\mathrm{.}00\%($an effective yield to maturity of $6\mathrm{.}09\%).$

$10$

As of December $31,2021$ the authorized capital of Canadian Tire consisted of $20$ million preferred shares issued and outstanding and $75$ million common shares issued and outstanding. The outstanding Common Shares and Preferred Shares of CTC are listed on the Toronto Stock Exchange $("$TSX$")$ and are traded under the symbols CTC and CTC$.$a$,$ respectively. Preferred shares traded in a relatively narrow range in $2021$ closing the year at $$80\mathrm{.}81$ per share. Common shares traded in a higher range, closing $2021$ at $$100\mathrm{.}85$ per share.

$11$

Canadian Tire has consistently maintained a growth in the common share dividend of $4\%$ per year and they anticipate continuing that trend into the future. The dividend paid at the end of $2021$ was $$5\mathrm{.}721$ per share. The holders of Preferred Shares are entitled to receive a preferential non$-$cumulative dividend at the rate of $$1\mathrm{.}00$

every calendar quarter.

Note the following additional information:

$1.$ Flotation costs for the issuance of new debt would be $4\%$ of proceeds. For preferred and common shares flotation costs represent $10\%$ of the issue price,

$2.$ Canadian Tire has a coporate tax rate of $30\%.$

$3.$ Net Earnings $($after interest, taxes and preferred share dividends$)$ are forecasted to be $$160$ million for $2022.$ The company

has a dividend payout ratio of $31\mathrm{.}25\%.$Requirements:

A$.$ Find the market values of the outstanding bonds, preferred shares and common shares;

a$.$ If the par value of each bond is $$1,000,$ what is the market value of each bond? Given the number of bonds issued, what is the total market value of the bonds on Dec $31,2021?$

b$.$ What is the total market value of all issued preferred shares on Dec $31,2021?$

c$.$ What is the total market value of all issued common shares on Dec $31,2021?$

B$.$ Use the total market values calculated in part A as the weights in your Weighted Average Cost of Capital calculation. What weight is assigned to Debt, Preferred shares and Common shares $?$

c$.$ What is the after$-$tax cost of common shares in the form of retained earnines?

d$.$ What is the after$-$tax cost of preferred shares?

C$.$ Calculate the after$-$tax cost of the various components of WACC

$1.$ Bonds

a$.$ What is the nominal yield$-$to$-$maturity?

b$.$ What is the effective yield$-$to$-$maturity?

c$.$ Calculate the after$-$tax cost of new debt $($using the effective yield$-$to$-$maturity$).$

$2.$ Preferred shares:

$3.$ Common equity in the form of retained earnings:

$4.$ Common equity in the form of new shares:

D$.$ You now have enough information to calculate Weighted Average Cost of Capital.

D$.$ What is the Weighted Average Cost of Capital if:

$1.$ The company uses new debt, new preferred shares and just retained earnings?

$2.$ The company uses new debt, new preferred shares and new common shares?

E$.$ How much of the new capital projects can be funded without using new shareholders?

a$.$ What will be the increase in Canadian Tire retained earnings in $2022?$

b$.$ Given the weightings you calculated in part B$,$ how much of the $$404$ million would be funded through a combination of new debt, new preferred shares and just retained earnings.Read the above case carefully and gather the key facts in the space provided below. You will need these facts to solve each of the required questions so make sure you pay close attention to

the details of the case