finacial managment

QUESTION TWO COMPREHENSIVE QUESTION (CAPM, WACC, CF ANALYSIS) (15 Marks) Valley PLC is a leading company in Australia and you the below details relating to the capital structure of the company. Information concerning raising new capital Bonds $1,000 Face value 13% Coupon Rate (Annual Payments) 20 Term (Years) $25 Discount offered (required) to sell 'new bonds $10 Flotation Cost per bond Preference Shares 11% Required rate to sell new preference shares $100 Face Value $3 Flotation cost per share Ordinary Shares $83.33 Current Market Price $4.00 Discount on share price to sell new shares $5.40 Flotation Cost per bond $5.00 2021 - Proposed Dividend Dividend History $4.63 2020 $4.29 2019 $3.97 2018 $3.68 2017 $3.40 2016 a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available. Current Capital Structure Extract from Balance Sheet Current Market Values $1,000,000 Long-Term Debt $800,000 Preference Shares $2,000,000 Ordinary Shares $2,000,000 Long-Term Debt $750,000 Preference Shares $4,000,000 Ordinary Shares 33% 5% Tax Rate Risk Free Rate b) Calculate the WACC given the existing weights The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm's cost of capital in the medium term and believes they should be as follows Long-term debt Preference Shares Ordinary Shares 40% 15% 45% c) What impact do these new weights have on the WACC? The firm is now (in 2021) considering the following investment opportunity for the period 2002 2000 c) What impact do these new weights have on the WACC? The firm is now (in 2021) considering the following investment opportunity for the period 2022-2029 Data is as follows 1 Initial Outlay $1,600,000 Upgrade $700,000 Required at the end of Year 4 Incremental Sales 350,000 Increased sales units per annum - (Year 5-8) Working Capital $45,000 Increase required Estimated Life 8 Years Salvage Value $60,000 Depreciation Rate 0.125 For tax purposes The machine is fully depreciated by the end of its useful life Other Cash Expenses $60,000.00 Per annum (Years 1-4) Other Cash Expenses Production Costs Sales price Sales price $76,000.00 Per annum (Years 5-8) Per $0.15 Unit $0.75 Per Unit (Years 1-4) $1.02 Per Unit (Years 5-8) Sales estimates for next 8 years starting from 2022 Sales Year (Units) 2022 679651 2023 694903 2024 710155 1 2025 725406 2026 740658 2027 755909 2028 771161 2029 786413 d) Calculate the Net Present Value, Internal Rate of Return and Payback Period The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 percent. The information in the table below has been used by company management in calculating the stock beta value which is 1.151 and the expected return on the stock which is 12.5%. Stock Year Market Share Index Price 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2000 2400 2900 3500 4200 5000 5900 6000 6100 6200 6300 $15.00 $25.00 $33.00 $40.00 $45.00 $55.00 S62.00 $68.00 $74.00 $80.00 $83.33 e) Calculate the CAPM f) Explain why this figure may differ from that calculated above (i.e. Cost of equity - Ordinary Shares)