Alpine Co$.$ is a major international company with its head office in the UK$.$ Its shares and bonds are quoted on major international stock exchange. Alpine Co$.$ is evaluating the potential investment in an area in which it has not previously been involved. This investment will require $900$m$ to purchase premises, equipment and provide working capital. Extracts from the most recent $(20$X$1)$ statement of financial position is given below: Assets $m Non$-$current assets $2880$ Current assets $37606640$ Equity Share capital $450$ Retained earnings $22902740$ Liabilities Non$-$current liabilities $10\%$ secured bonds repayable at par $20$X$61800$ Current liabilities $21006640$ Current share price $($Pence$)500$ Bond price $($$$100)105$ Equity beta $1\mathrm{.}2$

Group Case study $$ M$.$Mgt Financial Markets and Management

Jan $$ Apr $2024$

Alpine Co proposes to finance the $$900$m investment with a combination of debt and equity as follows:

$$ $$390$m in debt paying interest at $9\mathrm{.}5\%$ per annum, secured on the new premises and repayable in $20$X$8$

$$ $$510$m in equity via rights issue. A discount of $15\%$ share price is likely. A marginally positive NPV of the proposed investment has been calculated using the discount rate $15\%.$ The entity$$s cost of equity plus a small premium, a rate judged to reflect the risk of this venture. The chief of Alpine Co$.$ thinks this is too marginal and is doubtful whether to go ahead with the investment or not. However, there is some disagreement among the directors about how this project was evaluated, in particular about the discount rate that has been used. Director A: Suggests the entity$$s current WACC is more appropriate Director B: Suggests calculating a discount rate using data from Chop$-$chop, a quoted entity, the main competitor in the new business area. Relevant data for this entity is as follows:

$$ Shares in issue: $600$ million currently quoted at $560$ cents each

$$ Debt outstanding: $$525$m variable rate bank loan

$$ Equity beta: $1\mathrm{.}6$

Other relevant information include:

$$ The risk$-$free rate is estimated at $5\%$ per annum and the return on market $12\%$ per annum. These rates are not expected to change in the foreseeable future.

$$ Alpine Co pays a corporate tax at $30\%$ and this rate is not expected to change in the foreseeable future.

$$ Issue costs should be ignored.

Questions

a$)$ Calculate the current WACC for Alpine Co$.$

b$)$ Calculate a project specific cost of equity of the new investment.

c$)$ Discuss whether financial management theory suggests that Alpine Co$.$ can reduce its WACC to a minimum level. $($you$$ll discuss traditional view and MM theories$)$