Question

In: Finance

X Co is identical in all operating and risk characteristics to Y Co, except that X...

X Co is identical in all operating and risk characteristics to Y Co, except that X Co is all equity financed and Y Co is financed by equity valued at RM2.1m and debt valued at RM0.9m based on market values. X Co and Y Co operate in a country where no tax is payable. The interest paid on Y Co’s debt is RM72,000 per annum, and it pays a dividend to shareholders of RM378,000 per annum. X Co pays an annual dividend of RM450,000.

Required:

(a) Calculate the value of X Co.

(b) Calculate the cost of capital for X Co.

(c) Calculate the cost of equity for Y Co, and the cost of debt for Y Co.

(d) Calculate the weighted average cost of capital for Y Co.

Solutions

Expert Solution

(a) Calculate the value of X Co. is the equity holding of the company. For this we have find the value of Equity using Dividend payout by X Co.

We assume, the dividend payout % is same as Y Co. Since both company do business in similar condition. So the dividend payout for Y Co or X Co is RM378,000/RM2.1M=18%.

Dividend payout of 18% for X Co = RM450,000

Equity Value = RM450,000/18%=RM2.5M

(b) Calculate the cost of capital for X Co. = will be dividend payout which is caluculated above i.e. 18%.

(c) Calculate the cost of equity for Y Co, and the cost of debt for Y Co. = 18% for Equity (Dividend Payout) and for Debt (RM72,000/RM0.9M)=8%

(d) Calculate the weighted average cost of capital for Y Co.

Since there is no tax, hence no need to consider tax effective cost of debt. WACC is Cost of equity + Efffective Cost of Debt.

weighted average cost of capital for Y Co.=((RM2.1M*18%)/(RM2.1+RM0.9M))+(RM0.9M*8%)/((RM2.1+RM0.9M))=15%

jeff jeffy answered 2 years ago
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