Question 5 (WACC)

Hummingbirds Ltd. is a company that makes furniture products for sales in Brisbane. The company has 85 million ordinary shares outstanding and a beta of 1.20. Its financing structure also includes 1 million semi-annual coupon bonds, each with a face value of $1,000. These bonds currently trades at 127% of par. The yield to maturity of the bonds is quoted at 6.208% per annum. The bonds have a coupon rate of 9.0% per annum and 15 years to maturity. Hummingbirds Ltd. currently trades at $32 per share. The market risk premium is 8.0% per annum and the risk-free rate is 5.0% per annum. The company is subject to a corporate tax rate of 35%.

Hummingbirds Ltd. plans to make a new line of furniture products. To evaluate whether it is worthwhile to undertake this project, it has hired you to estimate the weighted average cost of capital (WACC) for use in the NPV analysis of this potential project.

Answer the following questions:

(Round your final answers to 2 decimal places)

[Total marks: 2 + 2 + 2 + 2 + 2 + 5 = 15 marks]

1. What is the cost of equity for Hummingbirds Ltd.? [2 marks]
2. What is its cost of debt? [2 marks]
3. What is its market value of equity? [2 marks]
4. What is its market value of debt? [2 marks]

5. What is the market value of Hummingbirds Ltd.? [2 marks]

6. What is the WACC for Hummingbirds Ltd.? [5 marks]

5. What is the market value of Hummingbirds Ltd.? [2 marks]