This case study encompasses an application investment and financing decisions techniques in a real world. As a financial

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This Case Study Encompasses An Application Investment And Financing Decisions Techniques In A Real World As A Financial 1 (64.75 KiB) Viewed 28 times

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This case study encompasses an application investment and financing decisions techniques in a real world. As a financial analyst at an investment bank, assume you are assigned a task of calculating the cost financial mixture (WACC) of a group of companies (operating in the same country, but in different industries), in order to use it in evaluating the feasibility of different project and determine (advice) which company should apply which project (assume the decision is only based on the NPV calculations). Company 1 Company 1 is financed with debt, preference capital and ordinary equity, for which the following details are available, assume 20% tax rate: Debt: The firm has 20,000 corporate bonds on issue, each with a value of $1,100 and a mature after 9 years. The current yield to maturity is 15% per annum. Preference Capital: There are 2,000,000 preference shares on issue. The current preference share price is $342, and it pays annual preference dividends of $8. Ordinary Capital: 6,000,000 ordinary shares are on issue. The current ordinary share price is $120 per share, last dividend per share was $17. Dividends are expected to grow at a rate of 3% per year indefinitely. Company 2 Company 2 is financed with debt, and ordinary equity, for which the following details are available, assume 20% tax rate: Debt: The firm has 5,320 corporate bonds on issue, each with a value of $750 and a mature after 2 years. The current yield to maturity is 3.5% per annum.

Ordinary Capital: 7,200,000 ordinary shares are on issue. The current ordinary share price is $88.6 per share. The required rate of return on company shares equal 16% (no Rs calculation is needed here) Company 3 Company 3 is financed with debt, preference capital and ordinary equity, for which the following details are available, assume 20% tax rate: Debt: The firm has 1,400 corporate bonds on issue, each with a face value of $1,000 and a mature after 4 years. The coupon rate of 5% per annum, and the current yield to maturity is 5% per annum. Preference Capital: There are 360,000 preference shares on issue. The current preference share price is $74, and it pays annual preference dividends of $16. Ordinary Capital: 1,550,000 ordinary shares are on issue. The current ordinary share price is $66 per share, the share beta is 1.4, the market risk premium is 12%, and the risk free rate of return is 5%.

Each one of the three companies will need to evaluate the following projects using their own WACC. Cash Flow $-420,000 190,000 320,000 60,000 14,500 98,000 Cash Flow S-2,450,000 850,000 640,000 85,000 140,000 72,000 980,000 1,120,000 1,750,000 Project 1 Project 2 Time 0 1 2 3 4 5 Time 0 1 2 3 4 5 6 7 8

Questions: Q1: Find the WACC for each company. Q2: Find the NPV for each project using the cost of capital (WACC) of each company (separately). Q3: Based on your answer of Q2, rank the projects from higher to lower NPV for each company, and advice whether the companies should apply each project.