CONTEMPRORAY CORPORATE FINANCE

Contemporary Corporate Finance



Contemporary Corporate Finance

Task A

Question 1

Inputs for WACC Calculation:

Risk free rate (%) 4.00%

Yield-to-Maturity of debt (%) 11.50%

Equity risk premium (%) 7.50%

Beta of equity 1.66

Corporate tax rate (%) 30%

Common shares (MM) 10.0

Market value of debt (£, MM) £ 8.5

Question 2

The debt is £30 million. The pre-tax cost of liability capital is 8% per annum. The after-tax cost of liability capital is 8% × (1 - 35%) = 5.2%.  The coupon payments on company liability are levy deductible. If the firm has £10,000 of pre-tax coupon payments, its pre-tax riches declines by £10,000 and its after-tax riches declines £30 million. The periods pre-tax and after-tax are bewildering here. Suppose a firm has a task that comes back 10% on the capital bought into after giving all charges, encompassing government earnings taxes.

The firm desires £100,000 of capital for the project. The task comes back pre-tax earnings of £15,385 each year. It buys government earnings levies of £15,385 × 35% = £5,385, and has an after-tax earnings of £15,385 × (1 - 35%) = £10,000.

The firm can get the £100,000 of needed capital either from shareholders or creditors, both of who need a 12% come back, or £12,000 each year. The providers of capital, if shareholders or creditors are not worried with the firm's levy payments; they easily desire £12,000 a year.

If it takes the cash from shareholders, it should give them £12,000 each year from its after-tax earnings. It has only £10,000 in after-tax profits, which is not sufficient. If it takes the cash from shareholders, it should give them £12,000 each year from its after-tax earnings. The concern payments are levy deductible, so it buys the creditors£12,000 from its £15,385 pre-tax profits, and buys the government 35% × (£15,385- £12,000) = £1,185 in government earnings levies, departing it (1 - 35%) × (£15,385 - £12,000) = £2,200. If a firm has expanded sales of £5 million one quarter, initiating expanded anecdotes receivable of £3 million, it may require a short-term bank lend to supply £3 million of short period financing. 

 

 Task B

In considering the cost of equity for publicly swapped companies, we examined the risk of investments through the eyes of the marginal investors in these firms. With the supplemented assumption that these investors were well diversified, we were adept to characterize risk in periods of risk supplemented on to a diversified portfolio or market risk. The beta ...