Question

3. Fastrack Ltd. is a transportation company wanting to know if they should proceed with a particular investment. They have extracted some information from their balance sheet and also provided some other relevant data. The figures reflect their target capital structure. The tax rate is 30%. Calculate the WACC given the following information.

· Corporate bonds of $2m (face value $100 each and 9% pa coupon, paid annually, issued 6 years ago and maturing in 4 years). Yield to maturity is 7% pa.

· Perpetual preference shares of $1m (dividend rate of 12% pa of $5 face value, paid annually in arrears). The preference shares are currently trading at $5.70 each.

· Ordinary shares of $2m (issue price $2 each ordinary share). Next year's dividend is expected to be $0.50. The current price implicitly implies a dividend growth rate of 6% pa indefinitely. The current return on the market is 15% and the market risk premium is 6%. Fastrack's beta is 1.2.

*CAN YOU PLEASE SHOW HOW TO CALCULATE THIS ON EXCEL, AND PLEASE SHOW THE CALCULATIONS.

Thank you !!

also,

4. Why is the use of debt financing referred to as using financial ‘leverage’?

5. A firm has a current capital structure consisting of $1,400,000 of 9% (annual interest) debt and 500,000 ordinary shares. The firm’s tax rate is 30%. If the EBIT is expected to be $1,200,000, calculate the firm’s Earnings Per Share.

Answer 1

Cost of Debt = YTM of Bond

Cost of Preference Shares = Dividend / Market Price of Preference Shares

Cost of Equities = Risk Free Rate + (Beta * Market Risk Premium)
Market Risk Premium = Return on Market - Risk Free Rate