RIC

The assumptions are:

Risk free rate = 2.5%

Share beta = 0.60

ASX 200 (Stock market return) = 14%

Dividend payout ratio = 45%

Number of ordinary shares outstanding = 319490

Industry P/E1 ratio = 15 (where E1 denotes the next period's earnings)

Current traded price of an ordinary share = $2.0

Current market value of interest-bearing debt = $290,000

Cost of debt = 8.5%

Corporate tax rate = 30%

Floatation costs = 150 basis points

Questions:

a) Calculate the value of a RIC share using the constant growth model.

b) Calculate the value of RIC using the industry P/E1 ratio.

c) Justify the differences between the two values calculated in parts a and b, if any.

d) Calculate the weighted average cost of capital.

e) Assume that RIC will undergo a new expansion that requires $15 million to be raised in the bond market. Calculate the initial outlay for the expansion project adjusted for floatation costs.

f) Assume the following information about the bond issue: Coupon rate 11% with coupons paid semi-annually Discount rate 10% Term to maturity 5 years. Report the values of the first and last cash flows for this bond and calculate the price of one bond, assuming a face value of $1000.