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someone urgently help me wkth q1 all answeres please with explanation
SCENARIO Your team of three works in the Finance division of the Carlton Manufacturing Company Ltd. The company is in the process of deciding whether or not to purchase a new plastic injection machine. Your company's Chief Financial Officer has asked you to make a recommendation as to whether or not the company should proceed with the project based on the following information: A. Balance sheet and notes Carlton Manufacturing Company Ltd Balance Sheet as at 31/12/21 ASSETS LIABILITIES Notes Cash 140 Accounts payable 120 Accounts Receivable 200 Bank loan (interest only) 1 240 Inventory 610 Mortgage Loan 2 530 Property, plant & equipment 1,200 Corporate bonds 3 300 Total Assets 2,150 Total liabilities 1,190 SHAREHOLDERS' EQUITY Ordinary shares 430 Preference Shares 5 250 Retained earnings 280 Total shareholders' equity 960 Total liabilities and shareholders' equity 2.150 4 Notes 1. The interest rate on the bank loan is 8.2% p.a. 2. The interest rate on the mortgage loan is 5.9% pa. 3. The corporate bonds have a credit rating of AA and have 2 years to maturity. They make quarterly coupon payments at a coupon rate of 7% pa. Part 1: Calculate the company's Weighted Average Cost of Capital (30 marks) a) Calculate the before-tax cost of bank loans, mortgage loans, and corporate bonds (6 marks). b) Calculate the market value of bank loans, mortgage loans, and corporate bonds (6 marks). c) Calculate the cost of ordinary shares and preference shares (6 marks). d) Calculate the market prices of ordinary shares and preference shares (4 marks). e) Calculate the total market values of ordinary shares and preference shares (4 marks). f) Calculate the company's WACC (4 marks) 4. The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 1.2. They have just paid a dividend of 50.07. The dividend is expected to grow at a rate of 7% p.a. for the next 3 years, and after that, it will grow at a constant rate of 3% p.a. in perpetuity. 5. The preference shares have a par value of $1 each and are shown on the Balance Sheet at their par value. They pay a constant dividend of So.10, and they are currently trading for $1.2. 6. The risk premium for ordinary shares is 8%. 7. The corporate tax rate is 30%. The 2-year risk-free rate is 0.03%. The 10-year risk-free rate is 1.14% B. Credit Spread 6 VI 7 y SVT 91 Rating AAA AA+ AA AA- A+ A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC- CC Tyr 128 139 150 161 172 183 194 205 216 227 238 249 260 271 282 293 304 315 326 337 348 2 yr 168 179 190 201 212 223 234 245 256 267 278 289 300 311 322 333 344 355 366 377 388 3 yr 208 219 230 241 252 263 274 285 296 307 318 329 340 351 362 373 384 395 406 417 428 4 yr 248 259 270 281 292 303 314 325 336 347 358 369 Syr 288 299 310 321 332 343 354 365 376 387 398 409 420 431 442 453 464 475 486 497 508 328 339 350 361 372 383 394 405 416 427 438 449 460 471 482 493 504 515 526 537 548 368 379 390 401 412 423 434 445 456 467 478 489 500 511 $22 533 544 555 566 577 588 408 419 430 441 452 463 474 485 496 507 518 448 459 470 481 492 503 514 525 536 547 558 569 580 591 602 613 624 635 646 657 668 10 yr 488 499 S10 521 532 543 554 565 576 587 598 609 620 631 642 653 664 675 686 697 708 $29 380 391 402 413 424 435 446 457 468 540 351 562 573 584 595 606 617 628 4. The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 1.2. They have just paid a dividend of $0.07. The dividend is expected to grow at a rate of 7% pa. for the next 3 years, and after that, it will grow at a constant rate of 3% p.a, in perpetuity. 5. The preference shares have a par value of $1 each and are shown on the Balance Sheet at their par value. They pay a constant dividend of $0.10, and they are currently trading for $1.2. 6. The risk premium for ordinary shares is 8%. 7. The corporate tax rate is 30%. The 2-year risk-free rate is 0.03%. The 10-year risk-free rate is 1.14% B. Credit Spread 2 yr VE Sy SVE 4 YI 248 9 VE 10 V Rating AAA AA+ AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC . CC 1 128 139 150 161 172 183 194 205 216 227 238 249 260 271 282 293 304 315 326 337 348 168 179 190 201 212 223 234 245 256 267 278 289 300 311 322 333 344 355 366 377 388 208 219 230 241 252 263 274 285 296 307 318 329 340 351 362 373 384 395 406 417 428 259 270 281 292 303 314 325 336 347 358 369 380 391 402 413 424 435 446 457 468 288 299 310 321 332 343 354 365 376 387 398 409 420 431 442 453 464 475 486 497 508 328 339 350 361 372 383 394 405 416 427 438 449 460 471 482 493 504 SIS 526 537 548 7 yr 368 379 390 401 412 423 434 445 456 467 478 489 500 $11 522 533 544 SSS 566 577 588 408 419 430 441 452 463 474 485 496 507 518 529 540 551 562 573 584 595 606 617 628 448 459 470 481 492 503 514 525 536 547 558 569 580 591 602 613 624 635 646 657 668 488 499 SIO 521 532 543 554 565 576 587 598 609 620 631 642 653 664 675 686 697 708 SCENARIO Your team of three works in the Finance division of the Carlton Manufacturing Company Ltd. The company is in the process of deciding whether or not to purchase a new plastic injection machine. Your company's Chief Financial Officer has asked you to make a recommendation as to whether or not the company should proceed with the project based on the following information: A. Balance sheet and notes Carlton Manufacturing Company Ltd Balance Sheet as at 31/12/21 ASSETS LIABILITIES Notes Cash 140 Accounts payable 120 Accounts Receivable 200 Bank loan (interest only) 1 240 Inventory 610 Mortgage Loan 2 530 Property, plant & equipment 1,200 Corporate bonds 3 300 Total Assets 2,150 Total liabilities 1,190 SHAREHOLDERS' EQUITY Ordinary shares 430 Preference Shares 5 250 Retained earnings 280 Total shareholders' equity 960 Total liabilities and shareholders' equity 2.150 4 Notes 1. The interest rate on the bank loan is 8.2% p.a. 2. The interest rate on the mortgage loan is 5.9% pa. 3. The corporate bonds have a credit rating of AA and have 2 years to maturity. They make quarterly coupon payments at a coupon rate of 7% pa. Part 1: Calculate the company's Weighted Average Cost of Capital (30 marks) a) Calculate the before-tax cost of bank loans, mortgage loans, and corporate bonds (6 marks). b) Calculate the market value of bank loans, mortgage loans, and corporate bonds (6 marks). c) Calculate the cost of ordinary shares and preference shares (6 marks). d) Calculate the market prices of ordinary shares and preference shares (4 marks). e) Calculate the total market values of ordinary shares and preference shares (4 marks). f) Calculate the company's WACC (4 marks) 4. The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 1.2. They have just paid a dividend of 50.07. The dividend is expected to grow at a rate of 7% p.a. for the next 3 years, and after that, it will grow at a constant rate of 3% p.a. in perpetuity. 5. The preference shares have a par value of $1 each and are shown on the Balance Sheet at their par value. They pay a constant dividend of So.10, and they are currently trading for $1.2. 6. The risk premium for ordinary shares is 8%. 7. The corporate tax rate is 30%. The 2-year risk-free rate is 0.03%. The 10-year risk-free rate is 1.14% B. Credit Spread 6 VI 7 y SVT 91 Rating AAA AA+ AA AA- A+ A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC- CC Tyr 128 139 150 161 172 183 194 205 216 227 238 249 260 271 282 293 304 315 326 337 348 2 yr 168 179 190 201 212 223 234 245 256 267 278 289 300 311 322 333 344 355 366 377 388 3 yr 208 219 230 241 252 263 274 285 296 307 318 329 340 351 362 373 384 395 406 417 428 4 yr 248 259 270 281 292 303 314 325 336 347 358 369 Syr 288 299 310 321 332 343 354 365 376 387 398 409 420 431 442 453 464 475 486 497 508 328 339 350 361 372 383 394 405 416 427 438 449 460 471 482 493 504 515 526 537 548 368 379 390 401 412 423 434 445 456 467 478 489 500 511 $22 533 544 555 566 577 588 408 419 430 441 452 463 474 485 496 507 518 448 459 470 481 492 503 514 525 536 547 558 569 580 591 602 613 624 635 646 657 668 10 yr 488 499 S10 521 532 543 554 565 576 587 598 609 620 631 642 653 664 675 686 697 708 $29 380 391 402 413 424 435 446 457 468 540 351 562 573 584 595 606 617 628 4. The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 1.2. They have just paid a dividend of $0.07. The dividend is expected to grow at a rate of 7% pa. for the next 3 years, and after that, it will grow at a constant rate of 3% p.a, in perpetuity. 5. The preference shares have a par value of $1 each and are shown on the Balance Sheet at their par value. They pay a constant dividend of $0.10, and they are currently trading for $1.2. 6. The risk premium for ordinary shares is 8%. 7. The corporate tax rate is 30%. The 2-year risk-free rate is 0.03%. The 10-year risk-free rate is 1.14% B. Credit Spread 2 yr VE Sy SVE 4 YI 248 9 VE 10 V Rating AAA AA+ AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ CCC . CC 1 128 139 150 161 172 183 194 205 216 227 238 249 260 271 282 293 304 315 326 337 348 168 179 190 201 212 223 234 245 256 267 278 289 300 311 322 333 344 355 366 377 388 208 219 230 241 252 263 274 285 296 307 318 329 340 351 362 373 384 395 406 417 428 259 270 281 292 303 314 325 336 347 358 369 380 391 402 413 424 435 446 457 468 288 299 310 321 332 343 354 365 376 387 398 409 420 431 442 453 464 475 486 497 508 328 339 350 361 372 383 394 405 416 427 438 449 460 471 482 493 504 SIS 526 537 548 7 yr 368 379 390 401 412 423 434 445 456 467 478 489 500 $11 522 533 544 SSS 566 577 588 408 419 430 441 452 463 474 485 496 507 518 529 540 551 562 573 584 595 606 617 628 448 459 470 481 492 503 514 525 536 547 558 569 580 591 602 613 624 635 646 657 668 488 499 SIO 521 532 543 554 565 576 587 598 609 620 631 642 653 664 675 686 697 708
