Reckitt Benckiser Group plc is a British consumer goods company It is considering the replacement of one of its existing machines with a new model The existing machine can be sold now for 8,000 The new machine costs 50,000 and will generate free cash flows of 11,416 55 p a over the next 6 years The corporate tax rate is 35 The new machine has average risk Reckitt Benckisers debt equity ratio is 0 5 and it plans to maintain a constant debt equity ratio Reckitt Benckisers before tax cost of debt is 5 85 and its cost of equity is 13 10 a) Compute Reckitt Benckisers weighted average cost of capital (5 marks) b) What is the NPV of the new machine and should Reckitt Benckiser replace the old machine with the new one (10 marks) c) The average debt to value ratio in the pharmaceutical industry is 20 What would Reckitt Benckisers cost of equity be if it took on the average amount of debt of its industry at a cost of debt of 5 Do this calculation assuming the company does not pay taxes (10 marks) d) Given the capital structure change in question c), Modigliani and Miller would argue that according to their theory, Reckitt Benckisers WACC should decline because its cost of equity capital has declined Discuss Question 13 (answer all parts) Reckitt Benckiser Group plc is a British consumer goods company It is considering the replacement of one of its existing machines with a new model The existing machine can be sold now for 8,000 The new machine costs 50,000 and will generate free cash flows of 11,416 55 p a over the next 6 years The corporate tax rate is 35 The new machine has average risk Reckitt Benckiser's debt equity ratio is 0 5 and it plans to maintain a constant debt equity ratio Reckitt Benckiser's before tax cost of debt is 5 85 and its cost of equity is 13 10 a) Compute Reckitt Benckiser's weighted average cost of capital (5 marks) b) What is the NPV of the new machine and should Reckitt Benckiser replace the old machine with the new one (10 marks) c) The average debt to value ratio in the pharmaceutical industry is 20 What would Reckitt Benckiser's cost of equity be if it took on the average amount of debt of its industry at a cost of debt of 5 Do this calculation assuming the company does not pay taxes (10 marks) d) Given the capital structure change in question c), Modigliani and Miller would argue that according to their theory, Reckitt Benckiser's WACC should decline because its cost of equity capital has declined Discuss (10 marks)

The Answer is in the image, click to view ...

Answered step by step

Verified Expert Solution

Link Copied!

Question

1 Approved Answer

Posted on Sep 17, 2024

Reckitt Benckiser Group plc is a British consumer goods company. It is considering the replacement of one of its existing machines with a new model.

Reckitt Benckiser Group plc is a British consumer goods company. It is considering the replacement of one of its existing machines with a new model. The existing machine can be sold now for 8,000. The new machine costs 50,000 and will generate free cash flows of 11,416.55 p.a. over the next 6 years. The corporate tax rate is 35%. The new machine has average risk. Reckitt Benckisers debt-equity ratio is 0.5 and it plans to maintain a constant debt-equity ratio. Reckitt Benckisers before- tax cost of debt is 5.85% and its cost of equity is 13.10%.

a) Compute Reckitt Benckisers weighted average cost of capital.

(5 marks)
b) What is the NPV of the new machine and should Reckitt Benckiser replace the old machine with the new one?

(10 marks)

c) The average debt-to-value ratio in the pharmaceutical industry is 20%. What would Reckitt Benckisers cost of equity be if it took on the average amount of debt of its industry at a cost of debt of 5%? Do this calculation assuming the company does not pay taxes.

(10 marks)

d) Given the capital structure change in question c), Modigliani and Miller would argue that according to their theory, Reckitt Benckisers WACC should decline because its cost of equity capital has declined. Discuss.

image text in transcribed

Question 13 (answer all parts) Reckitt Benckiser Group plc is a British consumer goods company. It is considering the replacement of one of its existing machines with a new model. The existing machine can be sold now for 8,000. The new machine costs 50,000 and will generate free cash flows of 11,416.55 p.a. over the next 6 years. The corporate tax rate is 35%. The new machine has average risk. Reckitt Benckiser's debt-equity ratio is 0.5 and it plans to maintain a constant debt-equity ratio. Reckitt Benckiser's before- tax cost of debt is 5.85% and its cost of equity is 13.10%. a) Compute Reckitt Benckiser's weighted average cost of capital. (5 marks) b) What is the NPV of the new machine and should Reckitt Benckiser replace the old machine with the new one? (10 marks) c) The average debt-to-value ratio in the pharmaceutical industry is 20%. What would Reckitt Benckiser's cost of equity be if it took on the average amount of debt of its industry at a cost of debt of 5%? Do this calculation assuming the company does not pay taxes. (10 marks) d) Given the capital structure change in question c), Modigliani and Miller would argue that according to their theory, Reckitt Benckiser's WACC should decline because its cost of equity capital has declined. Discuss. (10 marks)