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Alpine Co . is a major international company with its head office in the UK . Its shares and bonds are quoted on major international
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 m$ to purchase premises, equipment and provide working capital.
Extracts from the most recent X statement of financial position is given below:
all amounts are in $ million
Assets
Noncurrent assets
Current assets
Total Assets
Equity
Share capital
Retained earnings
Total Equity
Liabilities
Noncurrent liabilities
secured bonds repayable at par X
Current liabilities
Total Liability
Current share price Pence
Bond price $
Equity beta
Alpine Co proposes to finance the $m investment with a combination of debt and equity as follows:
$m in debt paying interest at per annum, secured on the new premises and repayable in X
$m in equity via rights issue. A discount of share price is likely.
A marginally positive NPV of the proposed investment has been calculated using the discount rate The entitys 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 entitys current WACC is more appropriate
Director B: Suggests calculating a discount rate using data from Chopchop, a quoted entity, the main competitor in the new business area. Relevant data for this entity is as follows:
Shares in issue: million currently quoted at cents each
Debt outstanding: $m variable rate bank loan
Equity beta:
Other relevant information include:
The riskfree rate is estimated at per annum and the return on market per annum. These rates are not expected to change in the foreseeable future.
Alpine Co pays a corporate tax at 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. youll discuss traditional view and MM theories
NOTE: REQUESTING EXPERTS TO NOT USE AI OR CHATGPT, PLEASE. THANKYOU.
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