Question: Question 4 (this question has two parts, a) and b)) (5 + 3 = 8 marks) Part a) From the figures mentioned below of Umbrella

Question 4 (this question has two parts, a) and b)) (5 + 3 = 8 marks)

Part a)

From the figures mentioned below of Umbrella Corp, calculate the Weighted Average Cost of Capital (WACC).

Interest expenses	$443 million
Corporate tax rate	30%
Default spread	1.56%
Market Value of short term debt	$885 million
Market Value of long term debt	$9,552 million
Market value of operating liabilities	$1200 million
Total asset of firm	$18,349 million
Systematic risk	0.79
Market value of equity	$21,129 million
Risk free rate	1.7%
Market risk premium	4.72%

Answer:

Part b)

Massive Dynamics is a mining company. The company has come across investment opportunities in a corrupt country. It is planning to invest in that country using its excess cash. Historically, investment opportunities in that country have not been very profitable. However, the management of the company can gain a lot of private benefit from the contract. The management has paid bribes to senior government officials in that country to win a $1 billion contract. Massive Dynamics has been previously involved in these types of activities. The company is under investigation in its home country for violating principles of business ethics relating to its operations. Shareholders of this company are not happy with the management. In your opinion what changes can managers of Massive Dynamics make to gain shareholders trust? Explain clearly.

Answer:

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