Following are some of the relevant balance sheet and income statement numbers of SIM Corp, a...

 

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Following are some of the relevant balance sheet and income statement numbers of SIM Corp, a company which belongs to one of the emerging markets, was historically into essential consumer staples business, but recently ventured into consumer discretionary including luxury goods, specialty products etc. Assume that in this market, consumer discretionary is fragmented and the existing players are trying to identify how to penetrate to a wider market and improve the margins. The company has an average tax rate of 25% for all its businesses. Relevant items in balance sheet and income statement 2022 Equity capital Debt capital Long term loan Short term loan Notes payable Accounts payable PBIT Interest $4,000,000 $1,500,000 $500,000 $6,000,000 $6,000,000 $700,000 $2,100,000 $600,000 2021 $6,000,000 $5,000,000 $800,000 $4,000,000 $450,000 Capital market data: 1-year Govt Bond - 6% coupon, YTM -6.5% 5-year Govt Bond - 6.25% coupon, YTM - 7% 10-year Govt Bond - 7% coupon, YTM - 7.25% SIM Corp Bond market data: A ten-year bond issued in 2021 with a face value $100 Face value and a coupon rate of 10.5% is currently trading in the market at $86. SIM Corp has a beta of 1.2 and the market risk premium is 8%. Question 1 Based on the above 2022 balance sheet and income statement information, compute the post tax cost of debt, cost of equity and the cost of capital of SIM Corp. (25 Marks) Question 2 Suppose you use the SIM Corp bond market data to compute the revised cost of debt, at the same time keeping cost of equity and D/E ratio same, compute the revised cost of capital. (10 Marks) Question 3 According to this calculation, the risk of the company is higher or lower? Discuss the possible reasons for the higher/lower risk, considering the underlying business and the new business expansion mentioned in the case. (15 Marks) Following are some of the relevant balance sheet and income statement numbers of SIM Corp, a company which belongs to one of the emerging markets, was historically into essential consumer staples business, but recently ventured into consumer discretionary including luxury goods, specialty products etc. Assume that in this market, consumer discretionary is fragmented and the existing players are trying to identify how to penetrate to a wider market and improve the margins. The company has an average tax rate of 25% for all its businesses. Relevant items in balance sheet and income statement 2022 Equity capital Debt capital Long term loan Short term loan Notes payable Accounts payable PBIT Interest $4,000,000 $1,500,000 $500,000 $6,000,000 $6,000,000 $700,000 $2,100,000 $600,000 2021 $6,000,000 $5,000,000 $800,000 $4,000,000 $450,000 Capital market data: 1-year Govt Bond - 6% coupon, YTM -6.5% 5-year Govt Bond - 6.25% coupon, YTM - 7% 10-year Govt Bond - 7% coupon, YTM - 7.25% SIM Corp Bond market data: A ten-year bond issued in 2021 with a face value $100 Face value and a coupon rate of 10.5% is currently trading in the market at $86. SIM Corp has a beta of 1.2 and the market risk premium is 8%. Question 1 Based on the above 2022 balance sheet and income statement information, compute the post tax cost of debt, cost of equity and the cost of capital of SIM Corp. (25 Marks) Question 2 Suppose you use the SIM Corp bond market data to compute the revised cost of debt, at the same time keeping cost of equity and D/E ratio same, compute the revised cost of capital. (10 Marks) Question 3 According to this calculation, the risk of the company is higher or lower? Discuss the possible reasons for the higher/lower risk, considering the underlying business and the new business expansion mentioned in the case. (15 Marks)

Answer rating: 100% (QA)

Question 1 a Post Tax Cost of Debt The formula for the posttax cost of debt is textPosttax Cost of D... View the full answer