SYPETCO Ltd is a leading company in Australia and you the below details relating to the capital...

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SYPETCO Ltd is a leading company in Australia and you the below details relating to the capital structure of the company. Information concerning raising new capital Bonds $1,000 Face value 13% Coupon...

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SYPETCO Ltd is a leading company in Australia and you the below details relating to the capital structure of the company.

*Information concerning raising new capital*
Bonds	$1,000	Face value
	13%	Coupon Rate (Annual Payments)
	20	Term (Years)
	$25	Discount offered (required) to sell new bonds
	$10	Flotation Cost per bond
Preference Shares	11%	Required rate to sell new preference shares
	$100	Face Value
	$3	Flotation cost per share
Ordinary Shares	$83.33	Current Market Price
	$4.00	Discount on share price to sell new shares
	$5.40	Flotation Cost per bond
	$5.00	2021 - Proposed Dividend
Dividend History	$4.63	2020
	$4.29	2019
	$3.97	2018
	$3.68	2017
	$3.40	2016

Current Capital Structure

Extract from Balance

Sheet

$1,000,000

Long-Term Debt

	$800,000	Preference Shares
	$2,000,000	Ordinary Shares
Current Market Values	$2,000,000	Long-Term Debt
	$750,000	Preference Shares
	$4,000,000	Ordinary Shares
Tax Rate	33%
Risk Free Rate	5%

a) Calculate the cost associated with each new source of finance. The firm has no retained earnings available.

b) Calculate the WACC given the existing weights

The financial controller does not believe the existing capital structure weights are appropriate to minimise the firm’s cost of capital in the medium term and believes they should be as follows

Long-term debt	40%
Preference Shares	15%
Ordinary Shares	45%

c) What impact do these new weights have on the WACC?

The firm is now (in 2021) considering the following investment opportunity for the period XXXXXXXXXX.

Data is as follows

Initial Outlay	$1,600,000
Upgrade	$700,000	Required at the end of Year 4
Incremental Sales	350,000	Increased sales units per annum - (Year 5-8)
Working Capital	$45,000	Increase required
Estimated Life	8	Years
Salvage Value	$60,000
Depreciation Rate	0.125	For tax purposes
The machine is fully depreciated by the end of its useful life
Other Cash Expenses	$60,000.00	Per annum (Years 1-4)
Other Cash Expenses	$76,000.00	Per annum (Years 5-8)
Production Costs	$0.15	Per Unit
Sales price	$0.75	Per Unit (Years 1-4)
Sales price	$1.02	Per Unit (Years 5-8)

Sales estimates for next 8 years starting from 2022

Year

Sales (Units)

2022

679651

2023

694903

2024	710155
2025	725406
2026	740658
2027	755909
2028	771161
2029	786413

d) Calculate the Net Present Value, Internal Rate of Return and Payback Period

The financial controller is considering the use of the Capital Asset Pricing Model as a surrogate discount factor. The risk-free rate is 5 percent. The information in the table below has been used by company management in calculating the stock beta value which is 1.151 and the expected return on the stock which is 12.5%.

Year	Stock Market	Share
Year	Index	Price

2011	2000	$15.00
2012	2400	$25.00
2013	2900	$33.00
2014	3500	$40.00
2015	4200	$45.00
2016	5000	$55.00
2017	5900	$62.00
2018	6000	$68.00
2019	6100	$74.00
2020	6200	$80.00
2021	6300	$83.33

e) Calculate the CAPM

f) Explain why this figure may differ from that calculated above (i.e. Cost of equity

– Ordinary Shares)

waiba-1-r4ujy0fa.docx

Answered 2 days After Sep 13, 2021

Sumit · Accepted Answer

Part (a)
	Bonds
	Face Value	$   1,000
	Coupon Rate	13%
	Term 	20	 Years
	Discount 	$   25
	Flotation Cost	$   10
	Cost	9.03%
	Preference Share
	Preference Rate	11%
	Face Value	100
	Flotation Cost	3
	Formula 	Dividend on preference share / Net Proceeds from issue of preference share
	Cost	11.34%
	Equity Share:
	Current Market Share	$   83.33
	Dividend After 1 Year	$   5.00
	Growth rate of dividends	8%	See calculation below
	Floatation Costs	9.40%
	Growth rate of dividends
	Year	Dividend Amount	Growth Rate
	2020	4.63	7.9%
	2019	4.29	8.1%
	2018	3.97	7.9%
	2017	3.68	8.2%
	2016	3.4
	Cost of Equity	14.62%
Part (b)
	Cost of Equity	14.62%
	Cost of Bonds	9.03%
	Cost of Preference Share	11.34%
	Source of Funds	Amount	Cost of Fund
	Long-term Debt	$   1,000,000	$   90,259.07
	Preference Capital	$   800,000	$   90,721.65
	Ordinary Share	$   2,000,000	$   292,455.63
	Total	$   3,800,000.00	$   473,436.35
	Weighted Average Cost		12.46%
Part (c)
	Cost of Equity	14.62%
	Cost of Bonds	9.03%
	Cost of Preference Share	11.34%
	Source of Funds	Weight	Cost of Fund
	Long-term Debt	40%	3.

SYPETCO Ltd is a leading company in Australia and you the below details relating to the capital structure of the company. Information concerning raising new capital Bonds $1,000 Face value 13% Coupon...

c) What impact do these new weights have on the WACC?

d) Calculate the Net Present Value, Internal Rate of Return and Payback Period

e) Calculate the CAPM

Solution

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