Question 2 - Weighted Cost of Capital (20 Marks) . You are the financial manager for a multinational manufacturing company based in New Zealand. The company have identified three competing projects and would like to know which to proceed with. The company have limited funds to finance the various projects and would like guidance on how they should be ranked. Three projects have been suggested with the following internal rates of return Project 1 14% Project 2 11% Project 3 9% You have been provided with the following information to assist in your assessment The company issued 3,000 five-year semi-annual bonds two years ago with a face value of $1,000 and coupon rate of 12%. The bonds are currently trading at $1120 The company also have an 8% term loan with an outstanding principal of $850,000 The only other component of debt is a $1.0 million 6.5% mortgage The company have three components of equity including Retained earnings of $800.000 Ordinary shares issue value $2.00 $5 million 12% preference shares issue value $3.00 $3 million Additional Information: The ordinary shares are currently trading at $3.25 while the Preference shares are trading at $4.75 Return on government bonds is 3%, the market risk premium 9% and the growth rate in dividends has been consistently 3% over the past six years. A consultant has estimated the company to have a beta of 1.2. Dividends paid per ordinary share last year was $0.45 Corporate tax rate is 30% The bonds are currently trading for $1120 per bond Interest on the term loan is 8% and the Mortgage 6.5%. Required; 1. Calculate the return on Ordinary shares based on the CAPM. (2 marks) 2. Calculate the return on Ordinary shares based on the constant growth model (2 marks) 3. Complete the following table 2.1 to calculate the weighted average cost of capital (WACC). (Refer the excel spreadsheet for this assignment table 2.1. Once you have completed the table then cut and paste it to your word document as a picture. Use the average from questions 1 and 2 to calculate your COC for ordinary shares) (12 marks) . . Page 4 Market value Cost of Capital Table 2.1 Sources of Finance Ordinary Shares Preference Shares Retained Earnings Term Loan Mortgage Bonds Total WACC Weighted COC #DIV/01 #DIV/01 DIV/0! #DIV/01 #DIV/0! #DIV/01 #DIV/0! Proportion #DIV/0! #DIV/01 #DIV/01 #DIV/0! #DIV/01 NDIV/0! #DIV/01 F #DIV/0! 4. Based on your calculations above, recommend to the company what they should do in relation to the investment projects. Include the rationale for your answer) (2 marks) 5. Outline any other factors that should be taken into consideration (2 marks) Pihlin Question 2 - Weighted Cost of Capital (20 Marks) . You are the financial manager for a multinational manufacturing company based in New Zealand. The company have identified three competing projects and would like to know which to proceed with. The company have limited funds to finance the various projects and would like guidance on how they should be ranked. Three projects have been suggested with the following internal rates of return Project 1 14% Project 2 11% Project 3 9% You have been provided with the following information to assist in your assessment The company issued 3,000 five-year semi-annual bonds two years ago with a face value of $1,000 and coupon rate of 12%. The bonds are currently trading at $1120 The company also have an 8% term loan with an outstanding principal of $850,000 The only other component of debt is a $1.0 million 6.5% mortgage The company have three components of equity including Retained earnings of $800.000 Ordinary shares issue value $2.00 $5 million 12% preference shares issue value $3.00 $3 million Additional Information: The ordinary shares are currently trading at $3.25 while the Preference shares are trading at $4.75 Return on government bonds is 3%, the market risk premium 9% and the growth rate in dividends has been consistently 3% over the past six years. A consultant has estimated the company to have a beta of 1.2. Dividends paid per ordinary share last year was $0.45 Corporate tax rate is 30% The bonds are currently trading for $1120 per bond Interest on the term loan is 8% and the Mortgage 6.5%. Required; 1. Calculate the return on Ordinary shares based on the CAPM. (2 marks) 2. Calculate the return on Ordinary shares based on the constant growth model (2 marks) 3. Complete the following table 2.1 to calculate the weighted average cost of capital (WACC). (Refer the excel spreadsheet for this assignment table 2.1. Once you have completed the table then cut and paste it to your word document as a picture. Use the average from questions 1 and 2 to calculate your COC for ordinary shares) (12 marks) . . Page 4 Market value Cost of Capital Table 2.1 Sources of Finance Ordinary Shares Preference Shares Retained Earnings Term Loan Mortgage Bonds Total WACC Weighted COC #DIV/01 #DIV/01 DIV/0! #DIV/01 #DIV/0! #DIV/01 #DIV/0! Proportion #DIV/0! #DIV/01 #DIV/01 #DIV/0! #DIV/01 NDIV/0! #DIV/01 F #DIV/0! 4. Based on your calculations above, recommend to the company what they should do in relation to the investment projects. Include the rationale for your answer) (2 marks) 5. Outline any other factors that should be taken into consideration (2 marks) Pihlin