PART 3: Relevant Calculations (Beta, Cost of Debt, Cost of Equity, WACC)

Relevant Info part 3: (still applicable)

Please show supporting working in an excel spreadsheet.

Question

What are the closest approximate payback periods for Machine 1 and Machine 2?

Options:

3 years 3 months and 4 years six months

2 years 4 months and 2 years 8 months

3 years 8 months and 3 years 9 months

4 years two months and four years 3 months

4 years eleven months and five years

3 years six months and 3 years 11 months

Which machine is it financially better for Tartan Knitwear to purchase and the most appropriate reason why?

Options:

Machine 1 because it has a lower net present value

Machine 1 because it has a higher internal rate of return

Machine 2 because it has a longer payback period

Machine 2 because it has a higher net present value

Machine 1 because it has the shortest payback period

Machine 2 because it has a lower internal rate of return

You still work for Tartan Knitwear (from Assignment Part 3 Case Study). As you did such a good job of estimating the company's Weighted Average Cost of Capital (WACC) the General Manager has asked to evaluate the two potential machines and recommend which to purchase. Details of the investment opportunities: Machine 2 Machine 1 Data Anticipate sales volume (units) in year 1 Selling Price (expected to remain constant) Y1 Expected revenue Expected annual sales growth rate Fixed costs of production (excl depreciation) p.a. Variable costs of production p.a. (% of Revenue) Projected increase in NWC (Yo only) Machine purchase cost Machine instal lation costs 100,000 100,000 $100 $100 $10,000,00 0 $10,000,000 10% 10% $3,500,000 $4,000,000 40% 30% $500,000 $600,000 $12,000,000 $600,000 5 years Straight line $0 $10,000,000 $500,000 5 years Straight line $0 Expected useful life of machine Depreciation method Expected residual value All cash flows should be assumed to occur at the end of each financial year. All other data supplied in Part 3 of the assignment is still applicable. The WACC calcu lated in Part 3 should be rounded to 9% for use in this part of the assignment. You must lay out your spreadsheet as it appears on pages 315 to 321 of the textbook. To complete this assignment you MUST: answer the questions (which appear as multi-choice questions) on Canvas in the Assignment - Part Four section AND; upload your spreads heet on Canvas in the Assignment Part Four section Marks for correctly answered questions will not be awarded unless a supporting spreadsheet has been uploaded If you upload your spreadsheet but do not answer the questions correctly, no marks will be awarded. Determine Tartan Knitwear's: 1 1.30 (exactly) Beta Costs of Debt kBond 4.30% or 0.043 2 + 2 (1 1 = 4.346% (both accepted) kBond (effective) VBond $30m x $106.445 = $31,933,500 (market value must be used) WBond 31,933,500/110,433,500 = 28.92% kBank 5.75% VLoan $5,000,000 (in absence of any other information can assume to be market value) WLoan 5,000,000/110,433,500 4.53% kEquity 2.5% 1.3*(9.0%-2.5%) 10.95% VEquity $14.70 x $5m $73,500,000 WEquity 73,500,000/110,433,500 = 66.56% Cost of Equity = Weighted Average Cost of Capital (WACC) [28.9%*4.30%*(1-28%)]+[4.5%*5.75%*(1-28%)]+[66.5%* 10.95%] or A/T rate w*r rate W 4.30% 3.10% 0.8954% Bond 28.92% 5.75% 4.14% 4.53% 0.1875% Loan 10.95% 10.95% 66.56% 7.2883% Equity WACC 100.0% 8.3712% Appendix 1 - Balance Sheet (before machinery acquisition) Tartan Knitwear Limited Balance Sheet @ 31/07/19 Current Liabilities Current Assets Accounts Paya bles Cash 500,000 1,500,000 500,000 Accounts Receivables 500,000 Tax Due Inventory 1,000,000 Non-Current Liabilities Bonds (@ face value) 30,000,000 Bank Loan 5,000,000 Non-Current Assets Owners' Equity Issued Share Capital 90,000,000 PPE 25,000,000 Retained Earnings 30,000,000 Total L OE Total Assets 92,000,000 92,000,000 Appendix 2 Market Summary Data Company Tax Rate (t) Expected Market Return (rm) Risk Free Rate (rf) Bank Commercial Lending Rate (ro) 28% 9.0% 2.5% 5.75% Appendix 3 - Market History Data Tartan Share Price Year NZX50 Index @31/8 (Adjusted Close) (Adjusted Close) 8921 2019 14.71 11.35 2018 7694 2017 7348 8.67 2016 5921 6.51 5168 2015 5.01 2014 4538 7.24 3545 5.99 2013 2012 3396 2.55 2011 3034 1.18 3016 2010 1.76 3336 2009 2.58 4213 2008 5.77 2007 3581 4.38 2006 3.66 3360 2005 2788 3.43 3.01 2004 2212 Appendix 4 Tartan Knitwear Ltd Listing Summary TNK Tartan Knitwear Limted Ord Shares Instrument Name $14.700 Tartan Knitwear Limted Issued By ISIN NZ TNKLO001S3 $0.210/1.32% 2 week Change:+s4.519/38.42 % Ordnary Shares Activity Performance Fundamental Trading Status Trading 35 en $13.990 PE 22.370 Trades High $14760 EPS $0.657 Value $1,996,936 $14620 Low $1.510 NTA $14.70 2380 % Volume 135,846 High Bid Gross Div Yield Capitali sation $174,301 Low Offer $14.75 Securities Issued 5,000,000 00s Last updated 29/8/2018, 256 pm TNK Price History Load Interactive Charts 15.00 14.75 14 50 1425 14.00 13.75 13.50 13.25 13.00 6 Aug 1. Aug 20 Aug 27 Aug 0. Jul Appendix 5- Tartan Knitwear Ltd Bond Issue TNK TNK 15/12/2022 5.05 % Tartan Bands Instrument Name Tartan Kntwear Limited Issued By 4.30% NZTNKLO001 L ISIN -0.05% / -1.15 % 52 Week Change: 0.00%/0.00% Vanilla Carparate Bands $106.445 Price Per $100 Maturity Date 15 Dec 2022 Previous Payment Date 15 Jun 2019 Fundamental Performance Activity Trading status Tradng en 4.35% Face Value $1.000 Trades Coupon 5.650% High 430 Ne xt Recard Date 5 Dec 2019 Value $21,289.00 Low 4.30% Volume 20,000 Frequency Semi-amualy High Bid 435% Outstanding (000s) $30,000 Minimum Holding 5,000 Low Offer 4.30 Last pdated 20/8/2018 1.02 pm TNK Price History Load Interactive Charts 455 4.5 4.45 4.4 435 4.a 4.25 4.2 4.15 20. Aug 1.Aug ao. Jul 6. Aug 27 Aug