+ D Page view A Read aloud | Add text V Question 6 - 20 marks Culpepper Island Exploration Inc. (CIE) bas entered into a joint venture with an international entity and the Governments of Barbados and Trinidad & Tobago for the purpose of exploring an oil deposit off the northern shores of Barbados. A deposit was discovered some 40 miles off Barbados and CIE is in the process of assessing the raising of capital for the venture. Currently, CIE is considering a bond issue to the tune of $45,000,000 with a coupon rate of 7%. Bonds of a similar rating are currently yielding 8%. CIE bas already secured a line of credit with First-Barbados Bank with an effective cost of 10% to the tune of $5,000,000. The Government of Barbados has preferred equity in CIE in the amount of $10,000,000 and the Government of Trinidad also has invested in preferred equity the amount of $15,000,000. The Government of Barbados has common equity investments in the amount of $25,000,000. Both the preferred and common shares are traded on the Barbados Stock exchange. The current market price for the preferred equity is $110. The par value of preferred equity is $100 and it carries a 10% annual dividend. Common shares currently carry a market price per share of $30 and last year paid a 5 dividend. That dividend is anticipated to grow at a rate of 1% per year. There are currently 1,000,000 shares outstanding, Required: a) Assuming that CIE has an effective income tax rate of 30%, what is the weighted average cost of capital that should be used to appraise the investment opportunity? (15 marks) b) Briefly discuss why in a project finance scenario, one discount rate is often not appropriate for discounting cash flows (5 marks) BE a + D Page view A Read aloud | Add text V Question 6 - 20 marks Culpepper Island Exploration Inc. (CIE) bas entered into a joint venture with an international entity and the Governments of Barbados and Trinidad & Tobago for the purpose of exploring an oil deposit off the northern shores of Barbados. A deposit was discovered some 40 miles off Barbados and CIE is in the process of assessing the raising of capital for the venture. Currently, CIE is considering a bond issue to the tune of $45,000,000 with a coupon rate of 7%. Bonds of a similar rating are currently yielding 8%. CIE bas already secured a line of credit with First-Barbados Bank with an effective cost of 10% to the tune of $5,000,000. The Government of Barbados has preferred equity in CIE in the amount of $10,000,000 and the Government of Trinidad also has invested in preferred equity the amount of $15,000,000. The Government of Barbados has common equity investments in the amount of $25,000,000. Both the preferred and common shares are traded on the Barbados Stock exchange. The current market price for the preferred equity is $110. The par value of preferred equity is $100 and it carries a 10% annual dividend. Common shares currently carry a market price per share of $30 and last year paid a 5 dividend. That dividend is anticipated to grow at a rate of 1% per year. There are currently 1,000,000 shares outstanding, Required: a) Assuming that CIE has an effective income tax rate of 30%, what is the weighted average cost of capital that should be used to appraise the investment opportunity? (15 marks) b) Briefly discuss why in a project finance scenario, one discount rate is often not appropriate for discounting cash flows (5 marks) BE a
