L Question 6 Bowrab, Brewery Ltd (Bowrab) is planning to launch a new product of fresh beer to the market. This project requires an initial investment in equipment and net working capital of $850,000. The finance team has completed the estimation of future cash flows generating from this new product and has asked you to compute a discount rate to use in assessing the viability of the project. Information about Bowrab's capital structure is as follows: Bowrab, currently has 600 corporate bonds outstanding. This bond has a face value of $1,000, coupon rate of 5% p.a paid semi-annually and a yield to maturity of 6% p.a The preference share is traded at $8 per share paying a fixed dividend of $0.96 per share annually. There are 120,000 preference shares outstanding in the market . . The ordinary shares are selling at $25 with 100,000 shares outstanding. Assuming that the Treasury bond's rate is 2%, the market risk premium is 8.5% and Bowrab's beta is 0.96. Company's tax rate is 30% and the finance manager aims to maintain the current capital structure in the new project. Required a. Calculate the weight of each source of capital in current capital structure [5 marks] b. Calculate the total value of debts, preference shares and ordinary shares to be issued to finance the new project [6 marks] C. Calculate after-taxed cost of debt, after-taxed cost of preference shares and after- taxed cost of ordinary share. [6 marks] d. Calculate Bowrab's after-taxed Weighted Average Cost of Capital (WACC) [4 marks] e. Bowrab, has recently paid a dividend of $2 per share. The company expects to maintain a stable growth rate of 4% in a foreseeable future. Based on this information, re-calculate the cost of equity and after-tax WACC. [7 marks] [Question 6: 28 marks] L Question 6 Bowrab, Brewery Ltd (Bowrab) is planning to launch a new product of fresh beer to the market. This project requires an initial investment in equipment and net working capital of $850,000. The finance team has completed the estimation of future cash flows generating from this new product and has asked you to compute a discount rate to use in assessing the viability of the project. Information about Bowrab's capital structure is as follows: Bowrab, currently has 600 corporate bonds outstanding. This bond has a face value of $1,000, coupon rate of 5% p.a paid semi-annually and a yield to maturity of 6% p.a The preference share is traded at $8 per share paying a fixed dividend of $0.96 per share annually. There are 120,000 preference shares outstanding in the market . . The ordinary shares are selling at $25 with 100,000 shares outstanding. Assuming that the Treasury bond's rate is 2%, the market risk premium is 8.5% and Bowrab's beta is 0.96. Company's tax rate is 30% and the finance manager aims to maintain the current capital structure in the new project. Required a. Calculate the weight of each source of capital in current capital structure [5 marks] b. Calculate the total value of debts, preference shares and ordinary shares to be issued to finance the new project [6 marks] C. Calculate after-taxed cost of debt, after-taxed cost of preference shares and after- taxed cost of ordinary share. [6 marks] d. Calculate Bowrab's after-taxed Weighted Average Cost of Capital (WACC) [4 marks] e. Bowrab, has recently paid a dividend of $2 per share. The company expects to maintain a stable growth rate of 4% in a foreseeable future. Based on this information, re-calculate the cost of equity and after-tax WACC. [7 marks] [Question 6: 28 marks]
