QUESTION-1 (15+ 15- 30 marks) Beta Ltd operates a quite successful chain of milk
ID: 2335727 • Letter: Q
Question
QUESTION-1 (15+ 15- 30 marks) Beta Ltd operates a quite successful chain of milk products and tea houses across South East Asia, Beta plans to expand in South America. Therefore, Beta needs some funds for this investment. The company balance sheet in Australian Dollars(AS) is as follows Cash Accounts receivable Inventories Net fixed assets Total assets 1,500,000 2,400,000 1.310,000 Long-term debt 2,500 000 Common Equity 4,000,000 3,710,000 1710,000 Total Debt and Equity7.710,000 Nowadays the company's common equity is selling for a price equal to 2 times its book value and the firm's investors require a 10 percent return. The firm's bonds command a yield to maturity of 6 percent, and the firm faces a tax rate of 30 percent. At the end of the previous year Beta's bonds were trading near par value. a. What is the company's weighted average-eost of capital?(15 marks) b. Assume the following and determine what the firm's weighted average cost of capital is: Beta's stock price rises such that it is sold at 3.5 times its book value and the required rate increased to 15 per cent; and The market value of the bonds are 1.25 times their book value and yield to maturity is 8 percent. (15 marks) Base Cost hetere to co ette tur wei hte ng 04 20.01 0330 0-0 SS4Explanation / Answer
a)market value of equity=2*3710000=7420000
market value of debt=same a spar value=4000000
wt of debt=(4000000)/(4000000+7420000)=35.03%
Wt of equity=(7420000)/(4000000+7420000)=64.97%
cost of equity=10%
cost of debt=ytm*(1-tax)=6%*(1-30%)=4.2%
WACC=(wt of debt*cost of debt)+(wt of equity*cost of equity)
=(35.03%*4.2%)+(64.97%*10%)
=7.97%
b)market value of equity=3.5*3710000=12985000
market value of debt=1.25*4000000=5000000
wt of debt=(5000000)/(12985000+5000000)=27.80%
Wt of equity=(12985000)/(12985000+5000000)=72.20%
cost of equity=15%
cost of debt=ytm*(1-tax)=8%*(1-30%)=5.6%
WACC=(wt of debt*cost of debt)+(wt of equity*cost of equity)
=(27.80%*5.6%)+(72.20%*15%)
=12.39%