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The following information has been taken from the statement of financial position of Corfe Co , a listed company: $m $m Non - current assets
The following information has been taken from the statement of financial position of Corfe Co a listed company:
$m $m
Noncurrent assets
Current assets
Cash and cash equivalents
Other current assets
Total assets
$m $m
Equity and reserves
Ordinary shares
Reserves
Noncurrent liabilities
preference shares
loan notes
Bank loan
Current liabilities
Total equity and liabilities
The ordinary shares of Corfe Co have a nominal value of $ per share and a current exdividend market price of $ per share. A dividend of $ per share has just been paid.
The preference shares of Corfe Co have a nominal value of $ per share and an exdividend market price of $ per share.
The loan notes of Corfe Co have a nominal value of $ per loan note and a market price of $ per loan note. Annual interest has just been paid and the loan notes are redeemable in five years time at a premium to nominal value.
The bank loan has a variable interest rate.
The riskfree rate of return is per year and the equity risk premium is per year. Corfe Co has an equity beta of
Corfe Co pays corporation tax at a rate of
Investment in facilities
Corfe Cos board is looking to finance investments in facilities over the next three years, forecast to cost up to $ million. The board does not wish to obtain further longterm debt finance and is also unwilling to make an equity issue. This means that investments have to be financed from cash which can be made available internally. Board members have made a number of suggestions about how this can be done:
Director A has suggested that the company does not have a problem with funding new investments, as it has cash available in the reserves of $ million. If extra cash is required soon, Corfe Co could reduce its investment in working capital.
Director B has suggested selling the building which contains the companys headquarters in the capital city for $ million. This will raise a large oneoff sum and also save on ongoing property management costs. Head office support functions would be moved to a number of different locations rented outside the capital city.
Director C has commented that although a high dividend has just been paid, dividends could be reduced over the next three years, allowing spare cash for investment.
Required;
a Calculate the aftertax weighted average cost of capital of Corfe Co on a market value basis. marks
b Discuss the views expressed by the three directors on how the investment should be financed. marks
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