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BAFI 3184 WACC HOMEWORK

Homework assignment Part two

NAME:______________
NUMBER:_________________
Liabilities

Accounts payable
Bank overdraft
Commercial bills
Term loans
10% debentures ($1000 par)
Office mortgage

(7.50 points)

STUDENT
!!!ATTACH STATEMENT OF AUTHORSHIP!!!

Financial performance extract for Nguyen Linh Ltd.


Shareholders Equity

$1,666,000
$1,200,000
$1,000,000
$7,500,000
$16,000,000
$15,000,000

Paid-up capitalordinary shares ($1 par)


$2.00 preference shares ($2 par)
$1.00 convertible preference shares ($1 par)
Asset Revaluation Reserves
Retained earnings
General reserves

$12,000,000
$3,000,000
$3,000,000
$400,000
$600,000
$500,000

Additional information
o The ordinary shares are currently trading at $1.85 per share, the $2.00 preference shares are due to be delisted and are currently
trading at $2.80 and the $1.00 convertible preference shares are trading at $1.45.
o Government bonds are currently yielding 5%, and the expected return on the market portfolio is 14.50%.
o Nguyen Linh Ltd.s beta is 1.50.
o The corporate tax rate is 30%.
o The interest rate on the office mortgage was 9.00% at the time of the loan and it has 8 years remaining. If the company were to
borrow the mortgage today it would have to pay interest at a 4.5% premium over the current Government bond yield.
o The bank overdraft current rate is 14%.
o The commercial bills mature today and the required funds will be paid from the bank overdraft facility. The market interest rate
for commercial bills is at a 7% premium over the Government bond yield.
o Term loans mature in 4 years. Current interest rates are 9.50%. Term loans originally had a 12% interest rate.
o Debentures are due in 7 years. The current return on Nguyen Linh Ltd.s debentures is 3.5% above the Government bond yield.
o Interest is paid semi-annually on all Nguyen Linh Ltd.s debt (Except commercial bills)
o The existing capital structure is unlikely to change.

Task:
1.)
2.)
3.)
4.)
5.)

Which items should be included when calculating this firms WACC? (1 point)
Calculate the present value of each capital asset. (3 points)
Calculate the weight of each capital asset used to calculate WACC. (2 points)
Calculate the after-tax cost of each item (3 points)
Calculate the WACC (1 point)

Nguyen Linh Ltd.


WACC
BASE

MARKET
VALUE

WEIGHT

COST
BEFORE
TAX

COST
AFTER
TAX

WEIGHTED
COST

Bank overdraft
Term loan
Debentures
Office morgage
Ordinary shares
Preference shares
Convertible
preference share

2,200,000

0.0301

14.49%

10.14%

0.31%

8,112,097

0.1111

9.73%

6.81%

0.76%

17,246,908

0.2361

8.68%

6.08%

1.43%

14,731,902

0.2017

9.73%

6.81%

1.37%

22,200,000

0.3039

19.25%

19.25%

5.85%

4,200,000

0.0575

71.43%

71.43%

4.11%

4,350,000

0.0596

68.97%

68.97%

4.11%

TOTAL

73,040,908

WACC =

17.93%

Bank overdraft:
PV= 1,000,000+1,200,000= $2,200,000
Effective rate = [1+ 14%/2]2 1=14.49%
Cost after tax = 0.1449x 0.7= 10.14%
Weight cost= 0.03x10.14%=0.31%

Term loan:
7,500,000= PMT(1-1.06-8)/0.06 + 7,500,000/1.068
PMT= 450,000
PV=450,000(1-1.0475-8)/0.0475 + 7,500,000/1.04758
PV=8,112,907

Effective rate = [1+ 9.5%/2]2 1=9.73%


Cost after tax = 0.973x 0.7= 6.81%
Weight cost=0.111x6.81%=0.76%

Debentures:
PV=8000(1-1.0425-14)/0.0425+ 16,000,000/1.042514
PV=17,246,908
Effective rate = [1+ 8.5%/2]2 1=8.68%
Cost after tax = 8.68%.0.7= 6.08%
Weight cost=0.1236x6.08%=1.43%

Office Mortgage:
15,000,000= PMT(1-1.045-16)/0.045
PMT= $1,335,231
PV=1,235,231(1-1.0475-16)/0.0475

Effective rate = [1+ 9.5%/2]2 1=9.73%


Cost after tax = 9.73%.0.7= 6.81%
Weight cost=0.2x6.81%=1.37%

Ordinary share:
12,000,000x 1.85=$22,200,000
Effective rate = 5%+ (14.5%-5%)1.5=19.25%

Preference share:
3,000,000/2x2.8= $4,200,000
Effective rate = 2/2.8= 71.43%

Convertible share:
3,000,000x1.45= $4,350,000
Effective rate = 1/1.45= 68.97%

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