FIN 222 Corporate Finance- Weighted Average Cost of Capital

Task

1. What are the ways in which a corporation can distribute cash to its shareholders?

2. What is the effect on the cost of equity (and the weighted average cost of capital) under an imputation tax system, compared to a classical tax system (assuming shareholders are able to utilise franking credits)?
 
3. KML Limited has announced a $1 dividend. If KML’s last price while trading cum dividend is $50, what should its first ex-dividend price be (assuming perfect capital markets)?
 
4.
  • ACM Corporation has one million shares outstanding selling at $20 each.
  • It plans to repurchase 100000 shares at the market price. What will its market capitalisation be after the repurchase? What will its share price be?
5.
  • ELP Limited has assets of $500 million, $50 million of which are cash.
  • It has debt of $200 million.
  • If ELP repurchases $20 million of its share:
a. What changes will occur on its balance sheet?
b. What will its new leverage ratio be?

6.

  • Nitram Limited has $250 million of excess cash.
  • The firm has no debt and 500 million shares outstanding with a current market price of $15.
  • Nitram’s board has decided to pay out this cash as a one-off dividend.

 a. What is the ex-dividend price of a share in a perfect capital market?

 b. If the board instead decided to use the cash to do a one-off share repurchase, in a perfect capital market, what is the price of the shares once the repurchase is complete?

 c. In a perfect capital market, which policy in part (a) or (b) makes investors in the firm better off?

7.

  • You purchased CHQ shares for $40 and they are now selling for $50.
  • The company has announced that it plans a $10 special dividend.
  • Assume that the dividend is fully franked (100% imputation credits), the corporate tax rate is 30%, you have a marginal tax rate of 38% and you have held the shares for more than 12 months.

a. If you sell the shares or wait and receive the dividend, will you have different after-tax income?

b. Assume now that the dividends are unfranked. What is the difference between the two options in part (a)?

8. CoffeeCarts has a cost of equity of 15% (calculated assuming a classical tax system), an after-tax cost of debt of 4%, and is financed 70% with equity and 30% with debt. The corporate tax rate is 30%. What is this firm’s weighted average cost of capital:

a. assuming that investors cannot utilise franking credits paid by the firm (γ = 0)?
b. assuming that investors can utilise 50% of the franking credits paid by the firm (γ = 0.5)?
c. assuming that investors can fully utilise franking credits paid by the firm (γ = 1)?
 
9. 
  • Ebortal Limited carries $240 million in debt and has $20 million in excess cash.
  • Assume that the market value of debt equals its book value. The firm expects to generate $132 million in free cash flows, after corporate taxes, into perpetuity, with no growth expected.
  • Ebortal has a dividend payout ratio of 80%, which is expected to remain constant. (Assume 80% of free cash flows)
  • The before-tax cost of debt is 8% and the cost of equity to the firm is 12%. The corporate tax rate is 30%. Assume that Ebortal operates under a classical tax system.

a. What is the market value of equity?

b. What is the firm’s weighted average cost of capital?

10. Redo Problem 23, assuming that the firm expects to generate $132 million in free cash flows next year, and that these free cash flows are expected to grow at 2% in perpetuity, and that the firm operates under an imputation tax system and all its shareholders can fully utilise the franking credits to offset their personal tax.
 
a. What is the market value of equity?

b. What is the firm’s weighted average cost of capital?

 11. 

  • Richmond Ladders Limited has generated profits before tax in Australia of $45 million.
  • Its corporate tax rate is 30%.
  • Richmond has a constant dividend payout ratio of 65%.

a. What is the size of the dividend paid?

b. What is the value of franking credits distributed?
 
c. What is the value of undistributed franking credits?
Read less
QUALITY: 100% ORIGINAL PAPER – NO PLAGIARISM – CUSTOM PAPER

Leave a Reply

Your email address will not be published. Required fields are marked *