Reference no: EM132746393
Problem - Kelly Wine is considering a new project for its expansion and the CFO has asked you to work out an appropriate discount rate to use when evaluating this project.
Kelly Wine's current capital structure is as follows:
|
Source of capital
|
Book value
|
Market value
|
|
Debts
|
$1,500,000
|
$1,650,000
|
|
Ordinary share capital
|
$2,000,000
|
$2,650,000
|
|
Total
|
$3,500,000
|
$4,300,000
|
To finance the purchase, Kelly Wine can sell 10-year bonds paying annual coupon interest at a rate of 8% with the face value of $1,000. The bond is expected to be sold at $980.
Ordinary shares are currently traded at $32.5. The company recently paid a dividend of $2.5 this year and dividends are expected to grow by an average of 4% per year for the indefinite future.
The current company's tax rate is 30%.
Required -
A - Calculate the after-tax cost for each source of capital (debts and ordinary shares).
B - Assuming that the appropriate discount rate for the project is the firm's cost of capital. Determine the discount rate to be used for evaluating the project.
C - Instead of using the dividend cash flow approach used to answer question (a), your manager asks you to use the Capital Asset Pricing Model approach to value the cost of ordinary shares. What is the firm's cost of capital for the company under this method? Assuming that Treasury bond yield is 3.5%, the average market return is 13.5% and Kelly Wine's ordinary share has a beta of 1.05.
D - Consider your answer in question (b) and (c), if Kelly Wine has other 8 vineyards across Australia, which discount rate do you think the management should use for evaluating this new project? Justify your answer.
|
What the cumulative surplus is
: The beginning short-term debt is $28,000 with a quarterly interest rate of 1.4 percent. At quarter end, the cumulative surplus (deficit) is
|
|
Explain antimicrobial susceptibility test
: How do you measure the zones on the plate as results in antimicrobial susceptibility test?
|
|
Which is not a hedging strategy for wbs corporation
: According to the contract, WBS corporation would receive $5 million payment in 3 months. Which of the following is NOT a hedging strategy for WBS corporation?
|
|
Evolutionary relationship of the four organisms
: What can you infer about the evolutionary relationship of the four organisms: cow, chicken, potato, and yeast?
|
|
Determine discount rate to be used for evaluating project
: Assuming that the appropriate discount rate for the project is the firm's cost of capital. Determine the discount rate to be used for evaluating the project
|
|
Prepare the adjusted entries
: On September 1, 2019, Winnie-the-Pooh, a lawyer, opened his own legal practice. The business adjusts and closes its accounts at the end of each month.
|
|
Provide an interval estimate for the true population mean
: The standard deviation was .66. Provide an interval estimate for the true population mean GPA, u using a confidence coefficient of 0.98.
|
|
Why intravenous chemotherapy failed to completely
: What are some possible reasons why intravenous chemotherapy failed to completely cure the patient despite laboratory tests showing the bacterial
|
|
Prepare the adjusting journal entry to record the bad debt
: The Garvey Sign Company, Prepare the adjusting journal entry to record the bad debt provision for the year ended December 31, 2022.
|