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Your team of three works in the Finance division of the Hexa Manufacturing Ltd. The company is deciding on an investment in a new moulding machine for a new product line. Your team has been asked to make a recommendation as to whether the company should proceed with the project based on the following information: A. Balance sheet and notes You are required to complete the following tasks (show your working with the calculations): Part 1: Calculate the company's Weighted Average Cost of Capital (30 marks) a) Calculate the before-tax cost of bank loans, mortgage loans, and corporate bonds ( 6 marks). b) Calculate the (market) value of bank loans, mortgage loans, and corporate bonds ( 6 marks). c) Calculate the cost of ordinary shares and preference shares (6 marks). d) Calculate the market prices of ordinary shares and preference shares (4 marks). e) Calculate the total market values of ordinary shares and preference shares (4 marks). f) Calculate the company's WACC (4 marks). Notes: 1. The interest rate on the bank loan is 7.5% p.a. 2. The interest rate on the mortgage loan is 6.2% p.a. 3. The corporate bonds will mature in 3 years and have a credit rating of AA+. They make semiannual coupon payments at a coupon rate of 5% p.a. 4. The ordinary shares are recorded on the Balance Sheet at their book value of $1 per share. They have a beta of 0.9 . They have just paid a dividend of $0.09. The dividend is expected to grow at a rate of 8% p.a. for the next 4 years, and after that, it will grow at a constant rate of 2% p.a. in perpetuity. 5. The preference shares are recorded on the Balance Sheet at par value of $1 per share. They pay a fixed dividend of $0.14 and are currently trading for $1.8. 6. The market risk premium for ordinary shares is 5.94%. 7. The corporate tax rate is 30%. The 3 -year risk-free rate is 3.88%. The 10 -year risk-free rate is 4.2%. B. Credit Spread . Project Information - The equipment will cost $800, is expected to have a working life of 5 years. The company will incur an additional cost of $100 to transport the equipment and install it correctly. Straight-line depreciation to a book value of zero is employed. - The equipment is expected to have a salvage value of $130 at the end of 5 years. - The new equipment will increase revenue by $1,200 each year. However, it is estimated that 20% of this increased revenue results from existing customers switching to the new product. - Excluding maintenance, all other costs from operating the equipment will be $270 per year. Maintenance costs will be $100 in the first year of operation. As the equipment gets older, some parts will need to be replaced and the replacement will cost an additional $30 each year from year 2 to year 5 . - The company has spent $500 to research and scout for eligible vendors who provide machine that meets their requirement of electricity efficiency. - The equipment will require additional net working capital of $300. The net working capital will be recovered in full after the equipment is sold at the end of its working life. - The equipment will be installed in a building that is owned by the company but currently is not being used. If the project does not proceed, this building could be rented out for $230 per year. - After the project ends, the company needs to restore the building to its original condition, and it would cost $200. - The company has sufficient capital to undertake all positive-NPV projects. If the Payback Period method is used to evaluate projects, management's policy is that the maximum acceptable payback period is 4 years, and all cash flows in Year 0 would need to be recovered within 4 years for the project to be acceptable under this method. Your team of three works in the Finance division of the Hexa Manufacturing Ltd. The company is deciding on an investment in a new moulding machine for a new product line. Your team has been asked to make a recommendation as to whether the company should proceed with the project based on the following information: A. Balance sheet and notes You are required to complete the following tasks (show your working with the calculations): Part 1: Calculate the company's Weighted Average Cost of Capital (30 marks) a) Calculate the before-tax cost of bank loans, mortgage loans, and corporate bonds ( 6 marks). b) Calculate the (market) value of bank loans, mortgage loans, and corporate bonds ( 6 marks). c) Calculate the cost of ordinary shares and preference shares (6 marks). d) Calculate the market prices of ordinary shares and preference shares (4 marks). e) Calculate the total market values of ordinary shares and preference shares (4 marks). f) Calculate the company's WACC (4 marks). Notes: 1. The interest rate on the bank loan is 7.5% p.a. 2. The interest rate on the mortgage loan is 6.2% p.a. 3. The corporate bonds will mature in 3 years and have a credit rating of AA+. They make semiannual coupon payments at a coupon rate of 5% p.a. 4. The ordinary shares are recorded on the Balance Sheet at their book value of $1 per share. They have a beta of 0.9 . They have just paid a dividend of $0.09. The dividend is expected to grow at a rate of 8% p.a. for the next 4 years, and after that, it will grow at a constant rate of 2% p.a. in perpetuity. 5. The preference shares are recorded on the Balance Sheet at par value of $1 per share. They pay a fixed dividend of $0.14 and are currently trading for $1.8. 6. The market risk premium for ordinary shares is 5.94%. 7. The corporate tax rate is 30%. The 3 -year risk-free rate is 3.88%. The 10 -year risk-free rate is 4.2%. B. Credit Spread . Project Information - The equipment will cost $800, is expected to have a working life of 5 years. The company will incur an additional cost of $100 to transport the equipment and install it correctly. Straight-line depreciation to a book value of zero is employed. - The equipment is expected to have a salvage value of $130 at the end of 5 years. - The new equipment will increase revenue by $1,200 each year. However, it is estimated that 20% of this increased revenue results from existing customers switching to the new product. - Excluding maintenance, all other costs from operating the equipment will be $270 per year. Maintenance costs will be $100 in the first year of operation. As the equipment gets older, some parts will need to be replaced and the replacement will cost an additional $30 each year from year 2 to year 5 . - The company has spent $500 to research and scout for eligible vendors who provide machine that meets their requirement of electricity efficiency. - The equipment will require additional net working capital of $300. The net working capital will be recovered in full after the equipment is sold at the end of its working life. - The equipment will be installed in a building that is owned by the company but currently is not being used. If the project does not proceed, this building could be rented out for $230 per year. - After the project ends, the company needs to restore the building to its original condition, and it would cost $200. - The company has sufficient capital to undertake all positive-NPV projects. If the Payback Period method is used to evaluate projects, management's policy is that the maximum acceptable payback period is 4 years, and all cash flows in Year 0 would need to be recovered within 4 years for the project to be acceptable under this method