Thw case is from an Introduction to Finance Course at the Smith School of Business (COMM 121):
Question:
Thw case is from an Introduction to Finance Course at the Smith School of Business (COMM 121):
WEIGHTED AVERAGE COST OF CAPITAL (FALL 2023):
BOMBARDIER
Shin Lee, a commerce student at the Smith School of Business, had heard a great deal about recent turmoil at Bombardier - and it had piqued his interest in the company. Lee knew that a company in flux was often a good buy, especially if its future looked bright. Did Bombardier's future look bright? Having paid particular attention to his finance courses, Lee knew the answer to that question depended, in part, on the company's Weighted Average Cost of Capital (WACC) - a key indicator of its profitability going forward.
Lee's research informed him that Bombardier's Beta was2.88and that the Equity Market Risk Premium was5.00 per cent. He set out to calculate the weight of all the equity and preferred securities for Bombardier based on the closing share prices as of October 23, 2023. Bombardier's historical share pricing is available from sites such asYahoo Finance(please use "adjusted" closing share price). By looking at the 2022 Annual Report (available as an Additional Resource), Lee could determine the number of common and preferred shares outstanding (see p. 87 of the Annual Report) and exchange rates (see p. 86 of the Annual Report). He decided to ignore warrants, share options, PSUs and DSUs. The exchange rate is important because the values in the Annual Report are in USD whereas the share prices are in CAD. He will need then to convert the USD values to CAD (please do so using the rates in the annual report). He assumed the company's effective tax rate was32.9 per cent(an average of the last several years that Bombardier had a positive tax rate). Lee researched the Canadian 10-year bond yield at the Bank of Canada, which would be necessary in calculating the cost of equity for Bombardier. He found that the yield was approximately4.08 per cent. [Kindly note that we are using Bombardier's latest annual report and then using more recent market pricing for illustrative teaching purposes. Normally one would use the most recent publicly available financial statement data (i.e., quarterly statements) but we will use the annual report for the Case as it has the most disclosure and thus provides the best opportunity to get familiar with more detailed financial statements.]
Lee expected to incorporate the range of preferred shares and their most recent dividend payouts (see p. 88 of the Annual Report) into his cost of capital calculations. He assumes that the growth rate of all the preferred shares dividends is zero. He also assumes that both Class A and Class B common shares have the same cost of equity. When calculating the cost of debt, he would include the company's long-term debt (see p. 146 of the Annual Report). He assumes that the amounts of long-term debt on p. 146 of the Annual Report (the column with header December 31st, 2022) were the best estimates of the market values in USD. Lee decided to assume the first bond on the "Senior Note" list (the Dec. 2024 bond) was repaid and to ignore it for simplicity purposes. Lee found the bond prices for thefive additional bonds outstandingas of December 31, 2022 of Bombardier's bonds that are still outstandingusing the Bloomberg terminal at the Techplex in Goodes Hall (see Table 1, below; the face value is 100). The bond prices are necessary for the computation of the YTM of each bond. One issue is how to handle fractional years for bond maturities, especially knowing that they are semi-annual bonds. For simplicity, he decided to round the number of periods when computing the YTM of each bond, as seen in Table 1 below. In addition to the assumed five bonds still outstanding as of December 31, 2022, there are two other pieces of debt that you must take into account. For the cost of debt for the "Debentures" and "Other", use the "Contractual Interest Expense" listed on p. 146 of the Annual Report.
Assume the interest expense for the "Debentures" and "Other" are listed in the "Contractual" column.
Using the above information, please calculate Bombardier's Weighted Average Cost ofCapital. Please show details of all your work, including all weightings and cost of capital calculations. Please submit only one word or PDF document (you may cut and paste from excel, as long as everything is clearly labelled).
Exhibit 1: Bombardier Bonds
| Issue | Price | Years to Maturity |
|---|---|---|
| Mar. 2025 - 7.50% | $97.78 | 1 |
| Jun. 2026 - 7.13% | $92.56 | 3 |
| April 2027 - 7.88% | $94.12 | 3 |
| Feb. 2028 - 6.00% | $91.23 | 4 |
| May 2034 - 7.45% | $93.67 | 10 |
Here are the photos of the required pages from the 2022 Annual Report (in order: p. 87, p. 86, p. 88, p. 146). Let me know if you are missing a required page of the 2022 Annual Report to complete the case study and I will happily provide it for you.
Expert Answer:
