Woods Energy and Transportation Company (WETC)
Part II
The CBC has decided to finance all of the profitable projects based on its market capital structure but was worried that some of the projects have different risk than the firms overall risk. CBC decided to gather public information about its two divisions as shown in tables 5 and 6. The Company has 20 million shares outstanding and its stock price closed at $31.45 per share on the first week of January, 2016.
Preferred stock is trading at a price of $80 per share with a dividend yield of 8 percent. The current debt was financed with 30-year long-term debt with a par value of $1,000 and was issued 10 years ago with a coupon rate of 8%. The current bond is trading at its par value. However the new debt financing will have a 20 year maturity with interest rate based on Treasury bond rate and risk spread of 4.4%.
- Determine market value of the capital structures.
- What is the equity cost of capital of each division?
- What would be the Companys weighted average cost of capital before new financing?
- What is the equity cost of capital after financing?
- What is the Companys weighted average cost of capital after new financing?
- Compare the expected rate of return of each project with each division equity cost of capital. Which projects should CBC recommend?
- Is there any change in your recommendations if the comparison is made with the Companys weighted average cost of capital?
Table 2- Projects: Energy Transportation Energy Energy Energy Energy Energy Transportation Transportation Energy Investment ($4,000,000) ($3,000,000) ($3,000,000) ($4,000,000) ($7,000,000) ($4,000,000) ($5,000,000) ($5,000,000) ($5,000,000) ($5,000,000) Project Life $750,000 $1,250,000 $550,000 $1,250,000 $1,500,000 $2,000,000 $2,250,000 $900,000 $1,500,000 $500,000 $750,000 $975,000 $550,000 $1,250,000 $1,500,000 $2,000,000 $2,250,000 $900,000 $1,400,000 $650,000 $750,000 $750,000 $550,000 $1,250,000 $1,500,000 $1,500,000 $2,250,000 $900,000 $1,300,000 $750,000 $750,000 $650,000 $550,000 $1,000,000 $1,500,000 $900,000 $1,000,000 $800,000 $750,000 $500,000 $550,000 $1.000.000 $1,500,000 $900,000 $750,000 $900,000 $750,000 $450,000 $550,000 $1,000,000 $1,500,000 $900,000 $650,000 $1,000,000 $750,000 $550,000 $1,500,000 $900,000 $500,000 $1,100,000 $750,000 $550,000 $1,500,000 $900,000 $450,000 $1,500,000 $750,000 $550,000 $900,000 $300,000 $1,750,000 $750,000 $550,000 $900,000 $300,000 $2,000,000 31-Dec-13 $18,177 $123,978 $111,169 $34,427 $287,752 $67,302 $619,721 $10,238 ($92,636) $44,739 $937,115 31-Dec-14 $18,137 $128,933 $116,768 $31,569 $295,407 $72,332 $642,100 $10,219 ($97,785) $54,801 $977,074 31-Dec-15 $18,097 $133,889 $122,366 $28,710 $303,063 $77,362 $664,479 $10,200 ($102,933) $64,862 $1,017,032 Table 3- Balance Sheet (in thousands) Assets Current Assets Cash And Cash Equivalents Net Receivables Inventory Other Current Assets Total Current Assets Long Term Investments Property Plant and Equipment Goodwill Accumulated Amortization Other Assets Total Assets Liabilities Current Liabilities Accounts Payable Current Long Term Debt due Total Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges Minority Interest Total Liabilities Preferred Stock (par $100, yield 8% and 1.25 million shares) Stockholders' Equity Common Stock ( Class A owners, 20 million shares) Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Total Liabilities and Equity $68,350 $9,333 $77,683 $99,667 $12,726 $82,184 $1,202 $273,461 $125,000 $74,749 $9,833 $84,583 $120,667 $13,339 $51,102 $1,479 $271,168 $125,000 $81,149 $10,333 $91,482 $141,667 $13,951 $20,020 $1,756 $268,875 $125,000 $47,318 $524,743 $0 $98,575 $74,435 $429,870 $475,818 $0 $0 $128,902 $146,830 $6,307 $8,822 $663,654 $705,905 $937,116 | $977,074 $164,758 $11,337 $748,157 $1,017,032 Table 4- Income Statement (in thousands) Total Revenue Cost of Revenue Gross Profit Selling General and Administrative Others Operating Income or Loss Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income From Continuing Ops Net Income 31-Dec-13 $1,030,798 $550,044 $480,754 $262,895 $92,636 $125,223 $4,100 $121,123 $648 31-Dec-14 $1,083,793 $579,578 $504,215 $272,787 $97,785 $133,643 $5,055 $128,588 $789 $127,798 ($51,119) ($1,039) $75,640 $75,640 31-Dec-15 $1,136,788 $609,112 $527,676 $282,680 $102,933 $142,063 $6,010 $136,053 $930 $120,474 ($48,190) ($898) $71,387 $71,387 $135,122 ($54,049) ($1,180) $79,893 $79,893 Table 5- Trucking Industry Peer group Stock Symbol Recent Stock price Equity Beta ($) Enterprise Value (Mil. $) 1060 UACL CGI Stock Market Capital (Mil. $) 838 529 392 2410 29 22.73 Total Debt (Mil. $) 242 321 223 21 840 804 CVTI 26.18 22.47 Universal Truckload Services Celadon Group Covenant Transportation group Heartland Express JB Hunt Transport Services Inc Knight Transportation Landstar System USA Truck Werner Enterprises HTLD 1.64 1.35 1.35 0.47 0.91 0.81 0.7 JBHT 9950 626 2240 8920 1870 3280 1027 KNX 75.43 38 LSTR 3300 3300 268 74.53 USAK 25.58 350 30 114 75 25 WERN 225 | | | 221 22.19 1860 712 1.75 0.92 1.07 Marten Transport MRTN 741 Table 6- Energy Industry Peer group Stock Market Capital Stock Symbol Recent Stock Price Enterprise Value Total Debt Equity Beta (Mil. $) 4950 Arch Coal ACI Alpha Natural Resources ANR (Mil. $) 982 935 9340 8970 3420 (Mil. $) 5150 3430 3180 1410 6000 1.97 0.48 1.13 CNX 1219 CCJ ($) 5 4 41 23 16 28 61 83 1.2 BTU 4360 420 1064 9840 695 1.5 0.11 WLB CONSOL Energy Cameo Corp Peabody Energy Westmoreland Coal Alliance Holdings Group LP Alliance Resources Partners Cloud Peak Energy Walter Energy Inc. 340 AHGP 3650 4400 886 0.51 0.65 ARLP 3080 3830 886 CLD 1260 21 720 1630 2980 1.7 1.56 WALT 463 7 2780 TABLE 7 Total Annual Returns, 1926-2013 Investment Average Return Large Stocks 11.70% Small Stocks 16.70% Long-term Corporate Bonds 6.20% Long-term Government Bonds 5.90% U.S. Treasury Bills 3.70% Risk Premium 8.00% 13.00% 2.50% 2.20% 0.00% Table 8- US Treasury Bonds Rates- December, 2016 Maturity 3 Month 6 Month 2 Year 3 Year 5 Year 10 Year 20 Year Yield 0.02 0.04 0.45 0.91 1.73 2.8 3.6 Yesterday 0.02 0.05 0.4 0.89 1.69 2.68 3.53 Last Week 0.03 0.07 0.42 0.89 1.71 2.74 3.61 Last Month 0.01 0.06 0.3 0.67 1.47 2.66 3.63 Table 2- Projects: Energy Transportation Energy Energy Energy Energy Energy Transportation Transportation Energy Investment ($4,000,000) ($3,000,000) ($3,000,000) ($4,000,000) ($7,000,000) ($4,000,000) ($5,000,000) ($5,000,000) ($5,000,000) ($5,000,000) Project Life $750,000 $1,250,000 $550,000 $1,250,000 $1,500,000 $2,000,000 $2,250,000 $900,000 $1,500,000 $500,000 $750,000 $975,000 $550,000 $1,250,000 $1,500,000 $2,000,000 $2,250,000 $900,000 $1,400,000 $650,000 $750,000 $750,000 $550,000 $1,250,000 $1,500,000 $1,500,000 $2,250,000 $900,000 $1,300,000 $750,000 $750,000 $650,000 $550,000 $1,000,000 $1,500,000 $900,000 $1,000,000 $800,000 $750,000 $500,000 $550,000 $1.000.000 $1,500,000 $900,000 $750,000 $900,000 $750,000 $450,000 $550,000 $1,000,000 $1,500,000 $900,000 $650,000 $1,000,000 $750,000 $550,000 $1,500,000 $900,000 $500,000 $1,100,000 $750,000 $550,000 $1,500,000 $900,000 $450,000 $1,500,000 $750,000 $550,000 $900,000 $300,000 $1,750,000 $750,000 $550,000 $900,000 $300,000 $2,000,000 31-Dec-13 $18,177 $123,978 $111,169 $34,427 $287,752 $67,302 $619,721 $10,238 ($92,636) $44,739 $937,115 31-Dec-14 $18,137 $128,933 $116,768 $31,569 $295,407 $72,332 $642,100 $10,219 ($97,785) $54,801 $977,074 31-Dec-15 $18,097 $133,889 $122,366 $28,710 $303,063 $77,362 $664,479 $10,200 ($102,933) $64,862 $1,017,032 Table 3- Balance Sheet (in thousands) Assets Current Assets Cash And Cash Equivalents Net Receivables Inventory Other Current Assets Total Current Assets Long Term Investments Property Plant and Equipment Goodwill Accumulated Amortization Other Assets Total Assets Liabilities Current Liabilities Accounts Payable Current Long Term Debt due Total Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges Minority Interest Total Liabilities Preferred Stock (par $100, yield 8% and 1.25 million shares) Stockholders' Equity Common Stock ( Class A owners, 20 million shares) Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity Total Stockholder Equity Total Liabilities and Equity $68,350 $9,333 $77,683 $99,667 $12,726 $82,184 $1,202 $273,461 $125,000 $74,749 $9,833 $84,583 $120,667 $13,339 $51,102 $1,479 $271,168 $125,000 $81,149 $10,333 $91,482 $141,667 $13,951 $20,020 $1,756 $268,875 $125,000 $47,318 $524,743 $0 $98,575 $74,435 $429,870 $475,818 $0 $0 $128,902 $146,830 $6,307 $8,822 $663,654 $705,905 $937,116 | $977,074 $164,758 $11,337 $748,157 $1,017,032 Table 4- Income Statement (in thousands) Total Revenue Cost of Revenue Gross Profit Selling General and Administrative Others Operating Income or Loss Total Other Income/Expenses Net Earnings Before Interest And Taxes Interest Expense Income Before Tax Income Tax Expense Minority Interest Net Income From Continuing Ops Net Income 31-Dec-13 $1,030,798 $550,044 $480,754 $262,895 $92,636 $125,223 $4,100 $121,123 $648 31-Dec-14 $1,083,793 $579,578 $504,215 $272,787 $97,785 $133,643 $5,055 $128,588 $789 $127,798 ($51,119) ($1,039) $75,640 $75,640 31-Dec-15 $1,136,788 $609,112 $527,676 $282,680 $102,933 $142,063 $6,010 $136,053 $930 $120,474 ($48,190) ($898) $71,387 $71,387 $135,122 ($54,049) ($1,180) $79,893 $79,893 Table 5- Trucking Industry Peer group Stock Symbol Recent Stock price Equity Beta ($) Enterprise Value (Mil. $) 1060 UACL CGI Stock Market Capital (Mil. $) 838 529 392 2410 29 22.73 Total Debt (Mil. $) 242 321 223 21 840 804 CVTI 26.18 22.47 Universal Truckload Services Celadon Group Covenant Transportation group Heartland Express JB Hunt Transport Services Inc Knight Transportation Landstar System USA Truck Werner Enterprises HTLD 1.64 1.35 1.35 0.47 0.91 0.81 0.7 JBHT 9950 626 2240 8920 1870 3280 1027 KNX 75.43 38 LSTR 3300 3300 268 74.53 USAK 25.58 350 30 114 75 25 WERN 225 | | | 221 22.19 1860 712 1.75 0.92 1.07 Marten Transport MRTN 741 Table 6- Energy Industry Peer group Stock Market Capital Stock Symbol Recent Stock Price Enterprise Value Total Debt Equity Beta (Mil. $) 4950 Arch Coal ACI Alpha Natural Resources ANR (Mil. $) 982 935 9340 8970 3420 (Mil. $) 5150 3430 3180 1410 6000 1.97 0.48 1.13 CNX 1219 CCJ ($) 5 4 41 23 16 28 61 83 1.2 BTU 4360 420 1064 9840 695 1.5 0.11 WLB CONSOL Energy Cameo Corp Peabody Energy Westmoreland Coal Alliance Holdings Group LP Alliance Resources Partners Cloud Peak Energy Walter Energy Inc. 340 AHGP 3650 4400 886 0.51 0.65 ARLP 3080 3830 886 CLD 1260 21 720 1630 2980 1.7 1.56 WALT 463 7 2780 TABLE 7 Total Annual Returns, 1926-2013 Investment Average Return Large Stocks 11.70% Small Stocks 16.70% Long-term Corporate Bonds 6.20% Long-term Government Bonds 5.90% U.S. Treasury Bills 3.70% Risk Premium 8.00% 13.00% 2.50% 2.20% 0.00% Table 8- US Treasury Bonds Rates- December, 2016 Maturity 3 Month 6 Month 2 Year 3 Year 5 Year 10 Year 20 Year Yield 0.02 0.04 0.45 0.91 1.73 2.8 3.6 Yesterday 0.02 0.05 0.4 0.89 1.69 2.68 3.53 Last Week 0.03 0.07 0.42 0.89 1.71 2.74 3.61 Last Month 0.01 0.06 0.3 0.67 1.47 2.66 3.63
