Question Three Answer all parts Globoil plc is listed on the Dublin Stock Exchange. It has...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Question Three Answer all parts Globoil plc is listed on the Dublin Stock Exchange. It has two distinct divisions, Upstream. explores for and extracts oil and Downstream processes and sells oil and oil products. Downstream is considering a new Project ("Alpha"). It has forecast the expected cash flows associated with this project and estimated its Internal Rate of Return (IRR). Downstream management are concerned that assessing the project IRR against the company WACC would be inappropriate as the nature of Downstream divisions activities are significantly less risky than the company activities as a whole. The Chief Financial Officer of Globoil is unconvinced and argues that the Managing Director of Downstream division is trying to make the project appear more attractive than it actually is. The Downstream and the Upstream divisions account for approximately 40% and 60% of company profits respectively. Estimates of Globoil's beta are 1.7 (estimated over 60 days), 1.3 (estimated over 2 year) and 1.5 (estimated over 60 months). Globoil has a target Debt to Value ratio of 0.65/1, Estimates of the Equity Risk Premium are 8.0% (estimated over 1 year), 5.5% (estimated over 10 years) and 5.00% (estimated over 75 years). The marginal corporation tax rate is 35%. Globoil's debt comprises traded bonds, with a par value of €1,000 and 10 years remaining to maturity, which pay a semi-annual coupon (annual coupon of 5%) and are trading at €920 today. The following information is also available to you. Irish Listed Companies in the Oil Exploration and Extraction sector % of Profit Generated in Oil Exploration and Extraction Company Beta Debt/Value A 1.8 0.6 91% B 1.3 0.5 55% C 1.9 0.5 93% Government Bond Yields Yield to Maturity 1 Year 2 Year 5 Year 1.8% 2.5% 2.6% 30 Year 2.8% Page 3 of 6 Required: (i) (ii) Estimate a Weighted Average Cost of Capital appropriate for the analysis being conducted by the Downstream Division of Globoil plc. Briefly explain and comment on each choice you make about which inputs you use. (25 Marks) Critically assess the arguments of the Chief Financial Officer and the Management of Downstream Division in relation to the appropriate discount rate for this project. (10 Marks) (Total 35 Marks) Question Three Answer all parts Globoil plc is listed on the Dublin Stock Exchange. It has two distinct divisions, Upstream. explores for and extracts oil and Downstream processes and sells oil and oil products. Downstream is considering a new Project ("Alpha"). It has forecast the expected cash flows associated with this project and estimated its Internal Rate of Return (IRR). Downstream management are concerned that assessing the project IRR against the company WACC would be inappropriate as the nature of Downstream divisions activities are significantly less risky than the company activities as a whole. The Chief Financial Officer of Globoil is unconvinced and argues that the Managing Director of Downstream division is trying to make the project appear more attractive than it actually is. The Downstream and the Upstream divisions account for approximately 40% and 60% of company profits respectively. Estimates of Globoil's beta are 1.7 (estimated over 60 days), 1.3 (estimated over 2 year) and 1.5 (estimated over 60 months). Globoil has a target Debt to Value ratio of 0.65/1, Estimates of the Equity Risk Premium are 8.0% (estimated over 1 year), 5.5% (estimated over 10 years) and 5.00% (estimated over 75 years). The marginal corporation tax rate is 35%. Globoil's debt comprises traded bonds, with a par value of €1,000 and 10 years remaining to maturity, which pay a semi-annual coupon (annual coupon of 5%) and are trading at €920 today. The following information is also available to you. Irish Listed Companies in the Oil Exploration and Extraction sector % of Profit Generated in Oil Exploration and Extraction Company Beta Debt/Value A 1.8 0.6 91% B 1.3 0.5 55% C 1.9 0.5 93% Government Bond Yields Yield to Maturity 1 Year 2 Year 5 Year 1.8% 2.5% 2.6% 30 Year 2.8% Page 3 of 6 Required: (i) (ii) Estimate a Weighted Average Cost of Capital appropriate for the analysis being conducted by the Downstream Division of Globoil plc. Briefly explain and comment on each choice you make about which inputs you use. (25 Marks) Critically assess the arguments of the Chief Financial Officer and the Management of Downstream Division in relation to the appropriate discount rate for this project. (10 Marks) (Total 35 Marks)
Expert Answer:
Answer rating: 100% (QA)
i Estimate of Weighted Average Cost of Capital WACC for Downstream Division of Globoil plc 1 Estimat... View the full answer
Related Book For
Intermediate Accounting Volume 1
ISBN: 9781260306743
7th Edition
Authors: Thomas H. Beechy, Joan E. Conrod, Elizabeth Farrell, Ingrid McLeod Dick
Posted Date:
Students also viewed these finance questions
-
Peter Corporation paid $150,000 on January 1, 2020 for a 35% interest in Sand Inc. On January 1, 2020, the book value of Sand's stockholders' equity consisted of $200,000 of common stock and $200,000...
-
Q4 11 Points 4. Consider the following Current Data for ABC Corp.: Debt Equity Market Value (in millions of $) 16,000 26,000 Cost 7% 14% If ABC moves to and maintains a debt-to-value (D/V) ratio of...
-
The comparative balance sheet of Coulson, Inc. at December 31, 2016 and 2015, is as follows: The noncurrent asset, noncurrent liability, and stockholders' equity accounts for 2016 are as follows:...
-
A water sprinkler sprays water over a distance of 30 feet while rotating through an angle of 135. What area of lawn receives water? 135 30 ft
-
The cash flows associated with a project are shown below. The interest rate varies from year to year as shown. Determine an equivalent uniform annual series of cash flows. EOY Cash Flow Interest...
-
Alex Rodriguez Inc., a publishing company, is preparing its December 31, 2008, financial statements and must determine the proper accounting treatment for the following situations; they have retained...
-
1. Consider the recursive method whose definition appears below. public static String mysteryString (String s) { if (s.length()==1) else return s; } return s.substring (s.length()-1) + mysteryString...
-
Write a program that prompts the user to enter cities and end when done write a loop that prints out the first letter for each city. You must use a loop for this program SAMPLE RUN #1: java...
-
Per and Birthe Clausen have a son who will begin university 3 years from today. Expenses of 30,000 will need to be paid at the beginning of each of the 4 years that their son plans to attend...
-
Indicate whether you think the following claims regarding takeovers are true or false. In each case, provide a brief explanation for your answer. (a) By merging competitors, takeovers have created...
-
In April 2014, and with just 3.5 million in the bank and a monthly cost base of around 1 million, the Board of Directors of Rangers FC asked supporters to pay for the 2014/15 season tickets up front...
-
Y has a beta of 1.50 and an expected return of 17 per cent. Z has a beta of 0.80 and an expected return of 10.5 per cent. If the risk-free rate is 5.5 per cent and the market risk premium is 7.5 per...
-
Suppose the spot and 6-month forward rates on the Swedish krona are SKr10.7917/ and SKr12.00/, respectively. The annual risk-free rate in the United Kingdom is 2.5 per cent, and the annual risk-free...
-
Arthur is divorced with two dependent children, ages 8 and 13. His adjusted gross income is $28,000, in 2018, and he incurs qualified child care expenses of $6,000, $3,000 for each child. a. What is...
-
Why is disclosure of depreciation or amortization methods and rates so important?
-
At 31 December 20X8, Small Ltd. reported gross accounts receivable of $2,481,800. Investigation showed the following: a. The credit balance in the allowance for doubtful accounts was $182,400 after...
-
1. Loans and receivables are classified according to their business model. 2. All notes receivables are measured at amortized cost. 3. Overdrafts can be netted against a positive balance in a bank...
-
Yarn Imports Corp. is preparing an inventory listing, and is assigning a cost to inventory that arrived on December 29, two days before the end of the year. The following elements of potential cost...
-
Scientists propose that the first macromolecules in protobionts were a. DNA molecules. b. RNA molecules. c. proteins. d. all of the above.
-
Which of the following function(s) is/are carried out by piRITS or piRISC? a. Inhibits transcription of TEs b. Causes the degradation of TE RNA c. Causes chromosome breakage d. Both a and b are...
-
In the CRISPR-Cas system, what does tracrRNA bind to? a. crRNA and Cas1 protein b. crRNA and Cas2 protein c. crRNA and Cas9 protein d. Cas1 and Cas2 proteins
Study smarter with the SolutionInn App