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CT Corp Comprehensive Question Canadian Tire Corporation, Limited $($Canadian Tire$)$ is a family of companies that includes a retail segment and a financial services division, among others. The retail business is led by Canadian Tire, which was founded in $1922$ and provides Canadians with products for life in Canada across its Living, Playing, Fixing, Automotive and Seasonal categories. As noted in the Annual Report, the company was involved in a number of strategic initiatives in $2015,$ including: $$ Leading$-$edge technology initiatives such as their o Innovation centre in Waterloo, o Cloud computing centre in Winnipeg, and o Mobile wallet project. $$ They have also made significant investments $($and will continue to do so$)$ in productivity initiatives, streamlining the organizational structure and making a number of bold strategic marketing moves across each of our brands In all the company spent $$404\mathrm{.}0$ million in $2015$ on these initiatives. These initiatives required a multi$-$year commitment on the part of the Board of Directors as well as the senior management of Canadian Tire. As a result, the company plans to spend the same amount in $2016$ on special projects. Debt The company issued $2\mathrm{.}6$ million bonds, with a face value of $$1,000$ each. The bonds have a coupon rate of $10\mathrm{.}0\%,$ were issued at par and are payable semi$-$annually. The bonds have a $25$ year maturity and were issued six years ago. The superior credit ratings being associated with the company have had a positive effect on the Yield$-$to$-$Maturity rates for Canadian Tire$$s debt. A $$1,000$ Canadian Tire bond has a nominal yield of $6\mathrm{.}00\%($an effective yield to maturity of $6\mathrm{.}09\%).$ Capital As of December $31,2015$ the authorized capital of Canadian Tire consisted of $20$ million preferred shares issued and outstanding and $75$ million common shares issued and outstanding. The outstanding Common Shares and Preferred Shares of CTC are listed on the Toronto Stock Exchange $($TSX$)$ and are traded under the symbols CTC and CTC$.$a$,$ respectively. Preferred shares traded in a relatively narrow range in $2015$ closing the year at $$80\mathrm{.}81$ per share. Common shares traded in a higher range, closing $2015$ at $$100\mathrm{.}85$ per share. Note the following additional information: $$ Flotation costs for the issuance of new debt would be $4\%$ of proceeds. For preferred and common shares flotation costs represent $10\%$ of the issue price. $$ Canadian Tire has a coporate tax rate of $30\%.$ Net Earnings $($after interest, taxes and preferred share dividends$)$ are forecasted to be $$160$ million for $2016.$ The company has a dividend payout ratio of $31\mathrm{.}25\%.$ Requirements: A$.$ Find the market values of the outstanding bonds, preferred and common shares; a$.$ If the par value of each bond is $$1,000,$ what is the market value of each bond? $$1,498\mathrm{.}85$ b$.$ Given the number of bonds issued, what is the total market value of the bonds on Dec $31,2015?$ $$3,769\mathrm{.}608,000$ c$.$ What is the total market value of all issued preferred shares on Dec $31,2015?$ $$1,616\mathrm{.}200,000$ d$.$ What is the total market value of all issued common shares on Dec $31,2015?$ $$7,563\mathrm{.}750,000$ B$.$ Use the total market values calculated in part A as the weights in your Weighted Average Cost of Capital calculation. What weight is assigned to Debt $(29\mathrm{.}11\%),$ Preferred shares $(12\mathrm{.}48\%)$ and Common shares $(58\mathrm{.}41\%)?($Note: I$$m only looking for the weights here, not WACC.$)$ C$.$ Calculate how much of the $$404$ million Canadian Tire plans on spending on strategic initiatives can be funded without issuing new common stock: a$.$ What will be the increase in Canadian Tire retained earnings in $2016?($$$110,000,000)$ b$.$ Given the weightings you calculated in part B$,$ how much of the $$404$ million would be funded through a combination of new debt, new preferred shares and just retained earnings? $($$$188\mathrm{.}323,917)$ D$.$ Canadian Tire has consistently maintained a growth in the common share dividend of $4\%$ per year and they anticipate continuing that trend into the future. The dividend paid at the end of $2015$ was $$5\mathrm{.}721$ per share. The holders of Preferred Shares are entitled to receive a preferential non$-$cumulative dividend at the rate of $$1\mathrm{.}00$ every calendar quarter $.$ a$.$ What is the after$-$tax cost of common shares in the form of retained earnings? $(9\mathrm{.}90\%)$ b$.$ What is the after$-$tax cost of preferred shares? $(5\mathrm{.}50\%)$ E$.$ You now have enough information to calculate Weighted Average Cost of Capital. a$.$ What is the Weighted Average Cost of Capital if the company uses new debt, new preferred shares and just retained earnings? $(7\mathrm{.}76\%)$ Category After$-$tax cost Weights Weighted cost Debt $4\mathrm{.}441\%29\mathrm{.}11\%1\mathrm{.}2928$ Preferred $5\mathrm{.}500\%12\mathrm{.}48\%0\mathrm{.}6864$ Equity $9\mathrm{.}900\%58\mathrm{.}41\%5\mathrm{.}7826$ WACC $7\mathrm{.}7618\%$ b$.$ What will be the marginal cost of capital if the company must issue new debt, new preferred shares and new common shares? $(8\mathrm{.}40\%)$ Category After$-$tax cost Weights Weighted cost Debt Preferred Equity $11\mathrm{.}000\%6\mathrm{.}4251$ WACC $8\mathrm{.}4043$