Question

Your investment club is currently revising its investment portfolio, and one company that you have recommended for possible inclusion in the club’s portfolio is Select Harvests Limited (ASX Code: SHV). Select Harvests Limited operates in the food products industry and is involved in the processing, packaging, marketing and distribution of edible nuts (particularly almonds), dried fruits, seeds and a range of natural health foods. A key indicator that your investment club uses for screening purposes is firm risk, and you plan to determine the risk of Select Harvests Limited by estimating its current overall weighted average cost of capital (WACC). Your investment club has a 5-year investment horizon. You have gathered the following company and market information to assist with this task:

Select Harvests Limited’s market value-based Statement of Financial Position as at March 7^th 2014 is (in $AUD Thousands):

Assets		Liabilities and Shareholders’ Equity
Cash	8,939	Bank overdraft	1,873
Receivables	42,142	Trade creditors and accruals	29,495
Inventories	66,879	Short-term debt facility	39,000
Property, plant and equipment	125,032	Long-term unsecured notes	47,250
Biological assets – almond trees	88,415	Shareholders’ equity	414,426
Intangible assets	56,282
Other assets	144,355
Total Assets	532,044	Total Liabilities and Equity	532,044

Company information for Select Harvests Limited:

• Beta coefficient is currently 0.50
• Number of issued shares is 57,800,000
• Closing share price on March 7^th 2014 is $7.17 (Market capitalisation = $414,426,000)
• Bank overdraft interest rate = 2.78% after-tax
• Short-term debt facility has a current interest rate = 5.07% before tax
• Unsecured notes have a before-tax floating interest rate = 180-day bank bill rate + 5.00% margin
• Corporate tax rate = 30.00%

Market information:

• 180-day bank bill rate = 2.66% per annum
• 5-year Government bond yield = 3.46% per annum
• 10-year Government bond yield = 4.20% per annum
• All Ordinaries Index average return over the last 10 years = 9.25% per annum

Based on the above information, determine the current weighted average cost of capital (WACC) for Select Harvests Limited

Your investment club is currently revising its investment portfolio, and one company that you have recommended for possible inclusion in the club’s portfolio is Select Harvests Limited (ASX Code: SHV). Select Harvests Limited operates in the food products industry and is involved in the processing, packaging, marketing and distribution of edible nuts (particularly almonds), dried fruits, seeds and a range of natural health foods. A key indicator that your investment club uses for screening purposes is firm risk, and you plan to determine the risk of Select Harvests Limited by estimating its current overall weighted average cost of capital (WACC). Your investment club has a 5-year investment horizon. You have gathered the following company and market information to assist with this task:

Select Harvests Limited’s market value-based Statement of Financial Position as at March 7^th 2014 is (in $AUD Thousands):

Assets		Liabilities and Shareholders’ Equity
Cash	8,939	Bank overdraft	1,873
Receivables	42,142	Trade creditors and accruals	29,495
Inventories	66,879	Short-term debt facility	39,000
Property, plant and equipment	125,032	Long-term unsecured notes	47,250
Biological assets – almond trees	88,415	Shareholders’ equity	414,426
Intangible assets	56,282
Other assets	144,355
Total Assets	532,044	Total Liabilities and Equity	532,044

Company information for Select Harvests Limited:

• Beta coefficient is currently 0.50
• Number of issued shares is 57,800,000
• Closing share price on March 7^th 2014 is $7.17 (Market capitalisation = $414,426,000)
• Bank overdraft interest rate = 2.78% after-tax
• Short-term debt facility has a current interest rate = 5.07% before tax
• Unsecured notes have a before-tax floating interest rate = 180-day bank bill rate + 5.00% margin
• Corporate tax rate = 30.00%

Market information:

• 180-day bank bill rate = 2.66% per annum
• 5-year Government bond yield = 3.46% per annum
• 10-year Government bond yield = 4.20% per annum
• All Ordinaries Index average return over the last 10 years = 9.25% per annum

Based on the above information, determine the current weighted average cost of capital (WACC) for Select Harvests Limited

Answer 1

	After tax Cost of bank overdraft	2.78%
	After tax cost of short term debt	3.55%	(5.07*(1-0.3)
	After tax cost of unsecured note	5.36%	(2.66+5)*(1-0.3)		5.362
	Cost of equity :
	R=Rf+Beta*(Rm-Rf)
	Rf= Risk free rate=4.2%(10 year Govt.Bond yield
	Beta=0.5
	Rm=Market Return=9.25%
	R=4.2+0.5*(9.25-4.2)=	6.73%			6.73
	Cost of equity :	6.73%
		A	B=A/502549	C	D=B*C
		Market Value($000)	Weight	Cost	Weighted Cost
	Bank overdraft	1873	0.003727	2.78%	0.0104%
	Short term debt	39000	0.07760437	3.55%	0.2755%
	Unsecured note	47250	0.09402068	5.36%	0.5040%
	Shareholders' equity	414426	0.82464794	6.73%	5.5499%
	Total Capital	502549		SUM	6.3397%
	Weighted Average Cost of Capital (WACC)=		6.34%