BUSM4741 Financial Analytics For Managerial Decisions- a long discussion with he

Pedigree Pooch Food Ltd finances

 

As Lucy researched her expansion options, she also had a long discussion with her financial adviser who told her about a listed company called Pedigree Pooch Food Ltd, which produces dog food and treats and can be considered as a proxy. Lucy was able to find out that Pedigree Pooch Food Ltd finances its business as follows:

• 2 years ago, the company had issued 3,000 5-year bonds outstanding with an 8.0% coupon rate and semi-annual coupons. The face value of these bonds is $1,000 and they currently trade at $1,029.70. They have just paid the last coupon.

• 68,530 company shares are also outstanding, and currently trade at $40 each. Currently the risk-free rate and market risk premium are estimated to be 4.0% and 6.0%, respectively. The beta of a comparable firm is 0.75.

• Pedigree Pooch Food Ltd also borrowed $820,000 recently at 2.50% p.a., compounded weekly.

The corporate tax rate is 30%.  

Part B 

Two questions to be answered: 
(While these questions are solved in Excel, they must also be presented properly in a Word/Pdf document)

1. With the given information about Pedigree Pooch Food Ltd, estimate the suitable Weighted Average Cost of Capital (WACC) for Happy Paws Pty Ltd.

2. Using the WACC you have established, (round it to the nearest whole number), undertake an NPV analysis of the two alternatives Lucy has regarding the manufacturing machines for the dog treats.