PBA is a leading investment company in Australia and you the below details relating to the capital structure of the company. Information concerning raising new capital Bonds $1,000 Face value 13% Coupon Rate (Annual Payments) 20 Term (Years) $25 Discount offered (required) to sell new bonds $10 Flotation Cost per bond Preference Shares 11% Required rate to sell new preference shares $100 Face Value $3 Flotation cost per share Ordinary Shares $83.33 Current Market Price $4.00 Discount on share price to sell new shares $5.40 Flotation Cost per bond $5.00 2019 - Proposed Dividend Dividend History $4.63 2019 $4.29 2018 $3.97 2017 $3.68 2016 $3.40 2015 Current Canital Structure Extract from Balance Sheet Current Market Values $1.000.000 Long-Term Debt $800.000 Preference Shares $2.000.000 Ordinary Shares $2.000.000 Long-Term Debt $750,000 Preference Shares $4.000.000 Ordinary Shares 33% Tax Rate Risk Free Rate 5% a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available. b) Calculate the WACC given the existing weights The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm's cost of capital in the medium term and believes they should be as follows Long-term debt Preference Shares Ordinary Shares 40% 15% 45% c) What impact do these new weights have on the WACC? The firm is considering the following investment opportunity. (2020-2027) Data is as follows Initial Outlay $1,600,000 Upgrade $700,000 End of Year 4 Upgrade - 350.000 Increased sales units per annum - (Year 5-8) Working Capital $45.000 Increase required Estimated Life 8 Years Salvage Value $60.000 Depreciation Rate 0.125 For tax purposes The machine is fully depreciated by the end of its useful life Other Cash Expenses $60,000.00 Per annum (Years 1-4) Other Cash Expenses $76,000.00 Per annum (Years 5-8) Production Costs $0.15 Per Unit Sales price $0.75 Per Unit (Years 1-4 Sales price $1.02 Per Unit (Years 5-8) Prior sales estimates Year Sales 2010 520000 2011 530000 2012 540000 2013 560000 2014 565000 2015 590000 2016 600000 2017 610000 2018 615559 2019 659000 2020 680000 d) Calculate the Net Present Value, Internal Rate of Return and Payback Period The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 per cent. Year Stock Market Index Share Price 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2400 2900 3500 4200 5000 5900 6000 6100 6200 6300 $15.00 $25.00 $33.00 $40.00 $45.00 $55.00 $62.00 $68.00 $74.00 $80.00 $83.33 e) Calculate the CAPM f) Explain why this figure may differ from that calculated above (i.e. Cost of equity - Ordinary Shares) PBA is a leading investment company in Australia and you the below details relating to the capital structure of the company. Information concerning raising new capital Bonds $1,000 Face value 13% Coupon Rate (Annual Payments) 20 Term (Years) $25 Discount offered (required) to sell new bonds $10 Flotation Cost per bond Preference Shares 11% Required rate to sell new preference shares $100 Face Value $3 Flotation cost per share Ordinary Shares $83.33 Current Market Price $4.00 Discount on share price to sell new shares $5.40 Flotation Cost per bond $5.00 2019 - Proposed Dividend Dividend History $4.63 2019 $4.29 2018 $3.97 2017 $3.68 2016 $3.40 2015 Current Canital Structure Extract from Balance Sheet Current Market Values $1.000.000 Long-Term Debt $800.000 Preference Shares $2.000.000 Ordinary Shares $2.000.000 Long-Term Debt $750,000 Preference Shares $4.000.000 Ordinary Shares 33% Tax Rate Risk Free Rate 5% a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available. b) Calculate the WACC given the existing weights The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm's cost of capital in the medium term and believes they should be as follows Long-term debt Preference Shares Ordinary Shares 40% 15% 45% c) What impact do these new weights have on the WACC? The firm is considering the following investment opportunity. (2020-2027) Data is as follows Initial Outlay $1,600,000 Upgrade $700,000 End of Year 4 Upgrade - 350.000 Increased sales units per annum - (Year 5-8) Working Capital $45.000 Increase required Estimated Life 8 Years Salvage Value $60.000 Depreciation Rate 0.125 For tax purposes The machine is fully depreciated by the end of its useful life Other Cash Expenses $60,000.00 Per annum (Years 1-4) Other Cash Expenses $76,000.00 Per annum (Years 5-8) Production Costs $0.15 Per Unit Sales price $0.75 Per Unit (Years 1-4 Sales price $1.02 Per Unit (Years 5-8) Prior sales estimates Year Sales 2010 520000 2011 530000 2012 540000 2013 560000 2014 565000 2015 590000 2016 600000 2017 610000 2018 615559 2019 659000 2020 680000 d) Calculate the Net Present Value, Internal Rate of Return and Payback Period The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 per cent. Year Stock Market Index Share Price 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2000 2400 2900 3500 4200 5000 5900 6000 6100 6200 6300 $15.00 $25.00 $33.00 $40.00 $45.00 $55.00 $62.00 $68.00 $74.00 $80.00 $83.33 e) Calculate the CAPM f) Explain why this figure may differ from that calculated above (i.e. Cost of equity - Ordinary Shares)