Question
You are the financial manager for a multinational manufacturing company based in New Zealand. The company have identified three competing projects and would like to
You are the financial manager for a multinational manufacturing company based in New Zealand. The company have identified three competing projects and would like to know which to proceed with. The company have limited funds to finance the various projects and would like guidance on how they should be ranked. Three projects have been suggested with the following internal rates of return.
Project 1 14%
Project 2 11%
Project 3 9%
You have been provided with the following information to assist in your assessment.
The company issued 3,000 five-year semi-annual bonds two years ago with a face value of $1,000 and coupon rate of 12%. The bonds are currently trading at $1120. The company also have an 8% term loan with an outstanding principal of $850,000. The only other component of debt is a $1.0 million 6.5% mortgage.
The company have three components of equity including;
- Retained earnings of $800,000
- Ordinary shares issue value $2.00 $5 million
- 12% preference shares issue value $3.00 $3 million
Additional Information:
- The ordinary shares are currently trading at $3.25 while the Preference shares are trading at $4.75.
- Return on government bonds is 3%, the market risk premium 9% and the growth rate in dividends has been consistently 3% over the past six years. A consultant has estimated the company to have a beta of 1.2.
- Dividends paid per ordinary share last year was $0.45
- Corporate tax rate is 30%
- The bonds are currently trading for $1120 per bond
- Interest on the term loan is 8% and the Mortgage 6.5%.
Required;
- Calculate the return on Ordinary shares based on the CAPM. (2 marks)
- Calculate the return on Ordinary shares based on the constant growth model.
(2 marks)
- Complete the following table 2.1 to calculate the weighted average cost of capital (WACC). (Refer the excel spreadsheet for this assignment table 2.1. Once you have completed the table then cut and paste it to your word document as a picture. Use the average from questions 1 and 2 to calculate your COC for ordinary shares)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started