MA Licid Motors is a manufacturer of electric cars. While the car market prospects are fairly certain, its profitability depends crucially on the price of cobalt, which will drive the input cost of its batteries. Analysts believe that if, over the next one year, the price of cobalt rises to $60,000 per ton, the value of the firm (including all assets) will fall to $25 million. On the other hand, if the cobalt price falls over the year to $40,000, then the lower costs will raise the value of the firm to $35 million. The price of cobalt now i.e. at time 0 for this question) is $46,602. Licid is funded with a mix of debt and equity. The debt consists of secured and unsecured debt. The secured debt consists of zero coupon debt maturing in one year with a maturity value of $20 million and it is secured using assets that will remain worth a constant $5 million regardless of the price of cobalt. The unsecured debt is similarly zero coupon debt and also matures in one year and has a face value of $10 million. The two kinds of debt are equal in terms of seniority. The effective risk free rate for one year is 3%. A. Compute the payout at the end of the year for equity, unsecured debt, and secured debt in both scenarios (cobalt price falls and cobalt price rises) described above. B. Compute the value of the following now (i.e. at time 0, a year before the debt matures) i The firm i. The firm ii. Equity iii. Secured debt iv. Unsecured debt V. Total debt vi. Cost of secured debt vii. Cost of unsecured debt viii. Total cost of debt i.e. aggregated across all debt C) Use the following information only for part C and ignore them for parts A and B above. However, continue to use any numbers calculated in parts A and B (if they are required) to answer part C. The equity beta of the firm equals 2 and the expected return on the market equals 9% per year. The relevant corporate tax rate is 30% Compute the following: i. The cost of equity ii. The weighted average cost of capital. MA Licid Motors is a manufacturer of electric cars. While the car market prospects are fairly certain, its profitability depends crucially on the price of cobalt, which will drive the input cost of its batteries. Analysts believe that if, over the next one year, the price of cobalt rises to $60,000 per ton, the value of the firm (including all assets) will fall to $25 million. On the other hand, if the cobalt price falls over the year to $40,000, then the lower costs will raise the value of the firm to $35 million. The price of cobalt now i.e. at time 0 for this question) is $46,602. Licid is funded with a mix of debt and equity. The debt consists of secured and unsecured debt. The secured debt consists of zero coupon debt maturing in one year with a maturity value of $20 million and it is secured using assets that will remain worth a constant $5 million regardless of the price of cobalt. The unsecured debt is similarly zero coupon debt and also matures in one year and has a face value of $10 million. The two kinds of debt are equal in terms of seniority. The effective risk free rate for one year is 3%. A. Compute the payout at the end of the year for equity, unsecured debt, and secured debt in both scenarios (cobalt price falls and cobalt price rises) described above. B. Compute the value of the following now (i.e. at time 0, a year before the debt matures) i The firm i. The firm ii. Equity iii. Secured debt iv. Unsecured debt V. Total debt vi. Cost of secured debt vii. Cost of unsecured debt viii. Total cost of debt i.e. aggregated across all debt C) Use the following information only for part C and ignore them for parts A and B above. However, continue to use any numbers calculated in parts A and B (if they are required) to answer part C. The equity beta of the firm equals 2 and the expected return on the market equals 9% per year. The relevant corporate tax rate is 30% Compute the following: i. The cost of equity ii. The weighted average cost of capital
