It is 5pm on 27^th April 2017. You are an intern with an investment fund and working hard to support your colleagues on various tasks. You are keen to demonstrate skills acquired from your finance course to increase the chance to be offered a permanent position. A colleague, Sanjay, is building a model to value Meridian Energy and needs your help to estimate the weighted average cost of capital (WACC). Common practice in this fund is to estimate beta by regressing 5-year monthly total returns to a stock on the monthly total returns to the NZX All index portfolio. However, Meridian has been listed for less than five years. Sanjay suggests that you estimate the equity beta of Contact Energy and use it to derive Meridians equity beta. Handing over a dataset that contains the adjusted closing prices of Contact Energy and the levels of NZX All Indices at the monthly frequency over the past 5 years (see worksheet Q1 in the Excel file FIN351_2017FC_AssignmentTwo_Data.xlsx), Sanjay asks you to come up with the WACC estimation for Meridian and supply him the sources of information and workings. You are keen to prove that you can work independently on this task.

Contact Energys Equity Beta. (5 marks). The Excel file contains two time series. They are adjusted closing prices on 27^th of each month of Contact Energy and the NZX All total return index over the past five years. Both the adjusted closing price series and the total return index series include dividends declared during each period. Derive returns to the market portfolio and those to holding Contact Energy shares. Then, estimate the equity beta of Contact Energy using two different methods. Method one is regression analysis. Method two is fitting a straight line on a plot chart with the equation showing. Print out the regression output and the plot chart and attach them to your solution as Appendix 1(1). Record your answers to four decimal places. Write down your final answer in the cell below.

Worksheet Q1

27/05/2012	3691.03	4.85
27/06/2012	3607.97	4.76
27/07/2012	3717.08	4.98
27/08/2012	3831.34	4.8
27/09/2012	4051.77	5.26
27/10/2012	4222.77	5.45
27/11/2012	4243.45	5.27
27/12/2012	4312.71	5.28
27/01/2013	4461.93	5.16
27/02/2013	4533.27	5.37
27/03/2013	4669.25	5.67
27/04/2013	4825.37	5.35
27/05/2013	4783.36	5.2
27/06/2013	4725.48	5.08
27/07/2013	4895.61	5.5
27/08/2013	4842.42	5.34
27/09/2013	5099.8	5.47
27/10/2013	5216.61	5.2
27/11/2013	5156.64	4.89
27/12/2013	5132.89	5.12
27/01/2014	5240.73	5.05
27/02/2014	5315.77	5.21
27/03/2014	5483.52	5.26
27/04/2014	5495.59	5.73
27/05/2014	5485.93	5.5
27/06/2014	5469.67	5.33
27/07/2014	5514.92	5.59
27/08/2014	5586.61	5.65
27/09/2014	5631.51	5.94
27/10/2014	5706.96	6.2
27/11/2014	5850.58	6.2
27/12/2014	5974.82	6.38
27/01/2015	6158.23	6.78
27/02/2015	6298.45	6.18
27/03/2015	6258.52	5.98
27/04/2015	6167.45	5.61
27/05/2015	6166.67	6.19
27/06/2015	6148.59	4.97
27/07/2015	6268.01	5.04
27/08/2015	6033.14	5.27
27/09/2015	6108.4	4.94
27/10/2015	6436.83	5.13
27/11/2015	6549.33	5.06
27/12/2015	6693.83	4.72
27/01/2016	6610.84	4.6
27/02/2016	6694.63	4.56
27/03/2016	7166.78	4.95
27/04/2016	7283.18	5.03
27/05/2016	7532.29	5.44
27/06/2016	7216.73	5.11
27/07/2016	7860.35	5.37
27/08/2016	7973.44	5.22
27/09/2016	7846.48	4.99
27/10/2016	7506.9	4.82
27/11/2016	7462.06	4.6
27/12/2016	7439.01	4.65
27/01/2017	7729.92	4.85
27/02/2017	7675.18	4.8
27/03/2017	7661.8	4.89
27/04/2017	7957.57	5.19

Contact Energys Equity Beta

Meridian Energys Equity Beta (15 marks). Go to Yahoo! New Zealand Business & Finance (https://nz.finance.yahoo.com/) and search for information that you can use to un-lever the beta of Contact Energy and re-lever it to obtain Meridian Energys equity beta. The tickers for these two firms are CEN.NZ and MEL.NZ. Estimating Meridian Energys equity beta involves four main steps. First, obtaining the market capitalisation of each firm as of 27^th April. You need to input the ticker of each firm in the Look Up box and click enter to go to the main Yahoo!Finance web page of each firm. Click on Historical Data on the page and obtain the closing price (Close) on 27^th April 2017. Click on Statistics on the left hand side of the page and obtain total number of shares outstanding from (Statistics). Second, obtain the book value of net debts from the most recent balance sheets in Yahoo!Finance. Third, un-lever the beta of the comparable company (CEN.NZ in this case) to obtain the asset beta. Fourth, re-level the industry asset beta to the leverage ratio of company that you are valuing to obtain its equity beta. Record your answer in the table below. Show your answers to debt ratios and betas to four decimal points and other answers to two decimal points.

	CEN.NZ	MEL.NZ
Closing Price on 27th April 2017 (NZD)
Shares Outstanding (NZD million)
Market Capitalisation (NZD million)
Latest balance sheet date
Short/Current Long Term Debt (NZD million)
Long Term Debt (NZD million)
Cash and Cash Equivalent (NZD million)
Net Debt (NZD million)
E/(D+E) (using net debt and market cap.)
D/E (using net debt and market cap.)
Equity beta
Asset beta

Cost of Equity of Meridian Energy (5 marks). Assume that the risk premium for New Zealand stock market is 5% p.a.. Go to the NZX debt market website for all traded bonds (https://www.nzx.com/markets/nzdx/bonds) to obtain New Zealand risk-free rate as of 27^th April. Scroll down the window to find the government bond with the longest maturity (GOV410). Access the link to this bond, scroll down the window and click on the button Load interactive chart on the chart titled Yield History. Now you can slide the red line across the chart to obtain the yield on 27^th April. Record this yield as the risk-free rate. Apply the capital asset pricing model to estimate the cost of equity of Meridian Energy.

Meridian Energys Equity Beta
NZ Market Risk Premium
Risk free rate (government stock yield)
Estimate date	27th April 2017
Cost of equity

Cost of Debt of Meridian Energy (2 marks). Assume that if Meridian Energy issues a bond with 10-year maturity now, the bond will have a rating of BBB+. Assume that a NZ$ BBB+ bond with 10-year maturity has a spread of 115 bps over the government stock. Estimate the cost of debt of Meridian Energy.

Estimate date	27th April 2017
Cost of debt

WACC of Meridian Energy (3 marks). Use the information from previous steps and assume the corporate marginal tax rate to be 28% to estimate the after-tax WACC for Meridian Energy. Show your workings and final answer below:

Workings:

Final Answer (show your answer in percentage with two decimal points):