Reference no: EM132392674
1. Below we give extracts from the annual financial statements of four companies, together with information concerning their stock market performance. Companies A and B are producers of fruit juices and other drinks from the beverage sector. The principal activities of companies C and D are the distribution of electronic components, microprosessor systems and related equipment. Company D is also involved in the manufacture of steel building products.
Company
A
B
C
D
Latest Financial Statement Extracts:
Shareholders' funds(mNOK)
Long term bonds (mNOK)
Dividend Per Share (in NOK)
Annual Dividend growth since 2014:
90.4
2.8
0.43
12%
65.4
5.8
0.82
10%
5.9
0.24
19%
33.3
1.1
0.99
22%
Current stock market details:
Equity market value (mNOK)
Market value of long-term loans (mNOK)
Equity beta value
Share price (NOK)
68.0
0.6
0.75
16.4
63.2
0.1
0.88
28.0
68.8
1.24
30.3
123.4
0.3
1.26
47.0
Assume that the return on government bonds is 11% and that the return on all long-term corporate loans is 12%. The market premium for risk should be assumed to be 9%.
a) Calculate the equity cost of capital, using both the dividend model and the CAPM.
b) Calculate the WACC for each of the four companies, assuming a corporation tax rate of 30%
c) Using both the information given in the question, and the results of your calculations in part(a), explain why the WACC's differ between the four companies.