FIN1FOF Assignment PART 2 PDF

Preview

Summary

Download FIN1FOF Assignment PART 2 PDF

Description

FIN1FOF ASSIGNMENT PART 2 GROUP 524 MEMBERS: MOHSIN ABBAS (19931155) NUR WARDERE (19930210) GORKEM UZUNBAY (19937947)

0

Contents EXECUTIVE SUMMARY:..........................................................................................................................2 INTRODUCTION:....................................................................................................................................2 WEIGHTED AVERAGE COST OF CAPITAL CALCULATIONS:.......................................................................3

1

EXECUTIVE SUMMARY: As an employee of Adelaide Manufacturing Company’s Financing division, I have done some research and come up with the Weighted Average Cost of Capital (WACC) for this project. The WACC represents the minimum rate of return at which a company produces value for its investors. Let's say a company produces a return of 20% and has a WACC of 11%. That means that for every dollar the company invests into capital, the company is creating nine cents of value. The figure came to 8.755% and this number signifies the fact that for every $1 Adelaide Manufacturing Company raises from investors, it must pay its investors almost $0.09 in return.

INTRODUCTION: The process of calculating the WACC was broken down into steps and the calculations are provided below. To summarise, we calculated the cost of both ordinary and preference shares and multiplied each by its weighting (its value divided by the total sum of values). The next step was to seek the before-tax cost of debt and multiply it by (1-0.3), as the tax rate is 30%. This was then multiplied by the weighing of debt and all the calculation were added together to finally produce the WACC. The formula below summarises the steps along with each variable being annotated.

2

WEIGHTED AVERAGE COST OF CAPITAL CALCULATIONS: 1. Capital Structure: Cost of Corporate Bonds: Before tax cost of debt = = 2.310% + 2.17% = 4.48% or 0.0448 After tax cost of debt = = 4.48% (1-0.3) = = 3.136% or 0.03136 Cost of Preference Shares: = 1.29/10.02 = = 12.87% Cost of Ordinary Shares: = 0.02735 + 1.2(0.075) = = 11.735% Corporate Tax Rate = 30% Value of Debt: CPN= (1,500,000 x 4.7%) / 2 = = $35250 = 35250 x 1/0.224 =(1- 1/(1.0224)^8) + 1,500,000/(1.0224)^8 = $285,097.97 Value of Preference Shares: = 10.02 x 600,000 = $6,012,000 Value of Ordinary Shares: Div 1= $0.69 Div 2= $0.69(1.07) = $0.7383 Div 3= $0.69(1.07)^2 = $0.789981 Div 4= $0.69(1.07)^3 = $0.84527967 Div 5= $0.69(1.07)^4 = $0.9044492469 Div 6= $0.9044492469(1.03) = $0.9315827243 0.69/(1.11735) + 0.7383/(1.11735)^2 + 0.789981 /(1.11735)^3 + 0.84527967 /(1.11735)^4 + 0.9044492469/(1.11735)^5 + 0.9315827243/(0.11735-0.03) x (1/1.11735)^5 3

= 0.6175 + 0.5913 + 0.5663 + 0.5423 + 0.5193 + 6.1236 = $8.96 = 2,000,000 x $8.96 = $17,920,000 WACC: (0.11735) x (2,000,000/4,100,000) + (0.1287) x (600,000/4,100,000) + (0.0448)(1-0.3) (1,500,000/4,100,000) = 0.08755

= 8.755%

4...