Taiwan Semiconductor Manufacturing Company, Limited (TSMC) was founded in 1987 in Taiwan. It is listed on the New York Stock Exchange (NYSE: TSM). TSMC is the world's most valuable semiconductor company. TSMC makes microchips for customers with process nodes from 2 microns to 7 nanometers. Recently, the company attracts media attention as U.S. tightens export controls over crucial chip supplies.

(a) Due to the potential negative economic impact of the pandemic, you and your friend have different estimates on TSMCs dividend payment.

Estimate A

You estimate that TSMCs dividend payment will be immediately down to $0 this year (year 0) and the next two years. But TSMC will resume dividend payment and pay a dividend of $0.60 per share 3 years from today, then to increase the dividend payment at a rapid rate of 45% in year 4 and a rate of 65% in year 5. You believe that the increase of dividend will then become constant at 10.50% from year 6.

Estimate B

Your friend also predicts that the dividend payment will be immediately reduced to $0 this year (year 0). However, she thinks that the company will resume dividend payment of $0.60 per share next year. However, the dividend growth will become negative in the following two years, i.e., -5.00% in year 2 and -15% in year 3, respectively. In years 4 and 5, your friend expects the dividend growth to be 45% and 65%, respectively, and to be 10.50% from year 6.

You and your friend observed that the U.S. Federal Reserve cut the benchmark interest rate to 0% in response to the coronavirus. Both of you find that the nominal risk-free rate declines to 0.75% while the market return is 3.65%. The beta of TSMC is 4.3.

Suppose TSMCs stock now is trading at $26 per share. Given the information above, which estimate is more precise?

(12 marks)

(b) Now, suppose TSMC issues a 10% annual coupon bond that currently sells for $915.50. The par value of the bond is $1,000. The bond price will increase to $919.5 in the next year. Assume that YTM does not change from year 0 to year 1. Please find the current yield and the capital gain yield of the bond and determine the YTM of the bond.

(6 marks)

(c) TSMC is considering building a factory making 5-nanometer transistor chips in Arizona, U.S. The estimated cash flows generated by the advanced chip plant would be -2,400 in year 0, 700 in year 1, 800 in year 2, 1,000 in year 3, 600 in year 4, and 800 in year 5. All numbers are in thousand U.S. dollars.

TSMC now has a debt to equity ratio that equals 2:1. Its target debt to equity ratio is 1:4. Suppose TSMC does not have preferred stocks. Its corporate tax rate is 25%. Use the cost of equity and cost of debt calculated from (a) and (b), to compute WACC and MIRR. According to the MIRR method, do you think TSMC should invest in the new factory?

(6 marks)