QUESTION ONE XYZ divisions, one in Nairobi. Division 1 and Division II. The foll
ID: 2533133 • Letter: Q
Question
QUESTION ONE XYZ divisions, one in Nairobi. Division 1 and Division II. The following data in respect of division has been provided. Limited is a private company located in Nairobi, Kenya. The company has two Division The following data for this division for the most recent period is as follows ITEM Sh' millions Revenues Earning before interest and Tax Book valuc of debt Book value of equity Working capital investment Non-cash charges Fixed capital investment 20 1.5 0.5 Tax rate 30% Additional information The division had a pre-tax interest of Sh. 100.000. There are ten publicly listed companies in the same business as this division and their average beta is 1.45. The average debt-equity ratio, based on book value of both debt and equity is 0.3. The estimated average return on the NSE-20 share index is 12 percent and annual average return on Treasury Bonds is five per cent.Explanation / Answer
Free cash flow
EBIT (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) - (capital expenditure).
4*(1-.3)+1-.5-2
1.3
cost of equity
risk free rate+(market return-risk free rate)*beta
5+(12-5)*1.45
15.15
cost of debt
interest/value of debt
.1/1
10%
after tax cost of debt
before tax rate*(1-tax rate)
10*(1-.3)
7
cost of capital - division
source
value
weight
cost
weight*cost
debt
1
0.4
7
2.8
equity
1.5
0.6
15.15
9.09
2.5
WACC
sum of weight*cost
11.89
Free cash flow
EBIT (1-tax rate) + (depreciation) + (amortization) - (change in net working capital) - (capital expenditure).
4*(1-.3)+1-.5-2
1.3
cost of equity
risk free rate+(market return-risk free rate)*beta
5+(12-5)*1.45
15.15
cost of debt
interest/value of debt
.1/1
10%
after tax cost of debt
before tax rate*(1-tax rate)
10*(1-.3)
7
cost of capital - division
source
value
weight
cost
weight*cost
debt
1
0.4
7
2.8
equity
1.5
0.6
15.15
9.09
2.5
WACC
sum of weight*cost
11.89
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