Question

AnimalChin! is a well-established company. Because of its market share and a fairly stable revenue stream, 5 years ago they successfully issued 20-year maturity 5% bonds, paying semiannually. Today, these bonds are selling for 93% of their face value. The total face value of these bonds is $5 billion. The company also issued 6% convertible bonds, paying semiannually, trading at 107% of their face value, maturing in 5 years. The total face value of these bonds is $3.5 billion. Finally, they just received a $3 billion term loan from a bank, the bank is currently charging a 4% interest on the loan. AnimalChin is publicly-traded. Today, its common stock trades for $40 per share. There are .2 billion shares outstanding. Its preferred stock is trading at $20 and just paid a dividend of $2. There are .1 billion preferred shares outstanding. The five financial analysts currently covering the company expect AnimalChin to grow at a similar pace as the whole skateboarding sector: about 2%. The last dividend paid on common stock was $3 per share. The company’s most recent estimated beta is 0.76. The risk-free rate is 3% and the expected market risk premium 6%. For the Veloce project the company’s CFO has decided to apply an adjustment factor of 1.8% to the compa-ny’s WACC to account for additional risk.

1. Calculate Animal Chin’s cost of all debt and the after-tax cost of debt.

2. Calculate Animal Chin’s average cost of equity.

3.Calculate Animal Chin’s cost of preferred.

4. Calculate the market value of debt, equity, preferred, and the company’s total market value.

5.Calculate the WACC.

6. Use the appropriate discount rate (subjective approach) and calculate the project NPV, IRR, and payback period (this is based on your CFFAs from Part 1

Item	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Year 7	Year 8
OCF		309,800,000	309,800,000	269,800,000	269,800,000	269,800,000	269,800,000	269,800,000	269,800,000
NCS	(1,700,000,000)
ATS	(128,000,000)								54,000,000
NWC	(145,000,000)								145,000,000
CFFA	(1,932,750,000)	309,800,000	309,800,000	269,800,000	269,800,000	269,800,000	269,800,000	269,800,000	468,800,000

**These are CFFA's from part 1 of project

7. Elephant Skateboards just approached your company and is willing to pay $250,000,000.00 today to have the right to produce and sell The Veloce as its own. Should Animal Chin! accept the offer? Explain why in light of your capital budgeting findings.

Answer 1

1. Cost of 20-year bond YTM = rate(40,50/2,-930,1000)*2 = 5.59%. After tax cost of debt = 5.59*(1-0.4) = 3.35%

Cost of convertible bond =rate(10,60/2,-1070,1000)*2 = 4.42%. After tax cost of debt = 4.42*(1-0.4) = 2.6545%

Bank Loan = 4%*(1-0.4) =2.4%

20 year bond = 0.93*5 = 4.65 Billion

convertible =1.07* 3.5 = 3.745 Billion

Bank loan = 3 Billion

Total = 11.395 Billion

Total after tax cost of debt = 4.65/11.395*3.35+3.745/11.395*2.6545 +3/11.395*2.4 = 2.87%

2. Cost of equity = Rf + beta *MRP = 3+0.76*6 = 7.56%

3. Cost of preferred stock = Div/Share price = 2/20 = 10%

4. Total debt = 11.395 Billion, total equity =40 *0.2 = 8 Billion, total preferred = 20*0.1 =2 Billion

Total Market value = $21.395 Billion

5.Weight of debt = 11.395/21.395 = 0.5326

Weight of equity = 8/21.395 = 0.3739

Weight of preferred = 0.0935

WACC =0.5326*2.87 +0.3739*7.56 +0.0935*10 = 5.33%

Note:We have answered 5 sub-parts. Please post others seperately as only a maximum of 5 sub-parts will be answered at a time