Vici Corp, based in the UK is a rapidly growing producer of circuit boards used
ID: 2788324 • Letter: V
Question
Vici Corp, based in the UK is a rapidly growing producer of circuit boards used in the electronic industry. The following are securities used by the company to finance its operations:
a) 400,000 ordinary shares, issued at a par value of £10, market price of one share is £36. The beta of the company is 1.20, and the expected return on the market is 12% per annum. The company has just paid a cash dividend of £2 per share, and the dividend is expected to grow at a steady 5% per year.
b) An overdraft of £500,000. The current interest rate on the overdraft is 10% per annum, with interest calculated on a quarterly basis.
c) 5,000 corporate bonds with six years to maturity. The debentures offer a coupon of 8% per annum, paid half yearly, (the coupon is calculated on the face value). The face value of all the debentures is £5,000,000, and the current market interest rate for these securities is 10% per annum, calculated half yearly. The bond sells for £911.37 now.
d) One thousand (1,000) 7% preference shares issued at a par value of £100, the current market price of one preference share is £111.
The UK T-Bills are currently yielding 5% p.a. and corporate tax rate is 30%.
What is the WACC (after tax) of the company? [Show ALL your workings. WACC & Cost of Debt should be in market value, preferably show calculation using financial calculator for i and Cost of Equity should be calculated using Dividend Growth Model (DGM)]
Explanation / Answer
Dividend Growth Model (DGM)
Cost of equity = 5% + (2/36) = 10.56%
Equity value = 400000*36 = 14400000
Overdraft annual rate = (1+10%/4)4 - 1 = 10.38%
Bond yield = 10%
Debt value = 5000*911.37 = 4556850
Preferred share rate = 7/111 = 6.31%
Preferred share value = 111*1000 = 111000
Total value = 14400000 + 500000 + 4556850 + 111000 = 19567850
We = 14400000 / 19567850 = 73.59%
Wd = 4556850 / 19567850 = 23.29%
Wo = 500000 / 19567850 = 2.56%
Wp = 111000 / 19567850 = 0.57%
WACC = 73.59%*10.56% + 23.29%*10% + 2.56%*10.38% + 0.57%*6.31% = 10.40%
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