ONE MULTISTEP QUESTION. Please show all steps and specify which part of the problem is being answered. If using excel, please list all steps/ formulas. (screenshots are also helpful!)
Question #3. A Game of Funds. In period 0, Goldencat, a London-based corporation, has the following capital structure: The corporation has 100,000 shares of common stocks outstanding, whose price fluctuates around Pcs,0 = 10 pounds per share. In that period, the company paid out dividend of Do = 1 per share. The financial market expects the dividend to grow in the future at a rate of g = 8% per year. The company's bond-holders, mostly bankers in Brussels, have also provided the company a long-term non-amortized loan worth 3 million pounds in period 0, and they are expecting a return (YTM) of 8%. Corporate tax rate is T = 25%. Goldencat also sold 50,000 preferred shares in the past to another company named RoseCo in order to raise capital to deal with previous crises. The fair market price of those preferred shares are estimated to be around Pp3,0 = 20 pounds per share in period 0. The terms of the preferred shares are such that every year RoseCo receives a fixed dividend of $3 pounds per preferred share. 5. In period 1, after debt payments and dividend payments are made to the investors, news breaks out that Goldencat has raised another 1,000,000 pounds of capital via bond issuance, and uses the proceeds of which to buy back all the preferred shares previously held by RoseCo. After this preferred shares buy-back, Goldencat only has debt and common stocks in its capital structure. The financial market does not react favorably to the news, since RoseCo is a well-regarded company whose preferred stock investment is viewed as a vote of confidence. As a result, the price of its common stock fell to Pcs,1 = 2 pounds per share in period 1. (a) Provide some intuitions on the reason behind the fall of Goldencat's common stock price between period 0 and period 1. (b) Compute Goldencat's WACC in period 1 (denote it as WACC1) under the following assumptions: i. The corporation is still committing to the dividend growth rate of g = 8% and is expected to pay out in period 2 a dividend of D2 = D1 (1+g) = D. (1+g)? = 1*(1+0.08)2 = 1.1664 pounds per share. ii. Bond investor are still expecting a return (YTM) of 8% in period 1, since the financial market believes that "a Goldencat always pays her/his debts". Corporate tax rate remains the same at T = 25%. The market value of Goldencat's debt is now 3,000,000 + 1,000,000 = 4,000,000 pounds Question #3. A Game of Funds. In period 0, Goldencat, a London-based corporation, has the following capital structure: The corporation has 100,000 shares of common stocks outstanding, whose price fluctuates around Pcs,0 = 10 pounds per share. In that period, the company paid out dividend of Do = 1 per share. The financial market expects the dividend to grow in the future at a rate of g = 8% per year. The company's bond-holders, mostly bankers in Brussels, have also provided the company a long-term non-amortized loan worth 3 million pounds in period 0, and they are expecting a return (YTM) of 8%. Corporate tax rate is T = 25%. Goldencat also sold 50,000 preferred shares in the past to another company named RoseCo in order to raise capital to deal with previous crises. The fair market price of those preferred shares are estimated to be around Pp3,0 = 20 pounds per share in period 0. The terms of the preferred shares are such that every year RoseCo receives a fixed dividend of $3 pounds per preferred share. 5. In period 1, after debt payments and dividend payments are made to the investors, news breaks out that Goldencat has raised another 1,000,000 pounds of capital via bond issuance, and uses the proceeds of which to buy back all the preferred shares previously held by RoseCo. After this preferred shares buy-back, Goldencat only has debt and common stocks in its capital structure. The financial market does not react favorably to the news, since RoseCo is a well-regarded company whose preferred stock investment is viewed as a vote of confidence. As a result, the price of its common stock fell to Pcs,1 = 2 pounds per share in period 1. (a) Provide some intuitions on the reason behind the fall of Goldencat's common stock price between period 0 and period 1. (b) Compute Goldencat's WACC in period 1 (denote it as WACC1) under the following assumptions: i. The corporation is still committing to the dividend growth rate of g = 8% and is expected to pay out in period 2 a dividend of D2 = D1 (1+g) = D. (1+g)? = 1*(1+0.08)2 = 1.1664 pounds per share. ii. Bond investor are still expecting a return (YTM) of 8% in period 1, since the financial market believes that "a Goldencat always pays her/his debts". Corporate tax rate remains the same at T = 25%. The market value of Goldencat's debt is now 3,000,000 + 1,000,000 = 4,000,000 pounds
