Page 4 of6 5 of 6 SAMPLE Final Examination FINMT401 Finance Question 9 Network P
ID: 2614960 • Letter: P
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Page 4 of6 5 of 6 SAMPLE Final Examination FINMT401 Finance Question 9 Network Pty Ltd is an unlisted company and manufactures computer systems. The company has recently reassessed their eapital budgeting procedures and have been advised to use the weighted average cost of capital (WACC) method to determine the discount rate for project evaluations A review of company and market information has revealed the following as at I July 2009 . The beta of Network Pty Ltd is 1.2 * The risk free rate is 4% p.a. * The expected rate of return on the market is 10% pa .Network has 300 000 ordinary shares on issue. The company paid a dividend of 25 cents per ordinary share on 30 June 2009 and the is that the dividend will grow at 5% pa. indefinitely . Network has 100 000 redeemable preference shares on issue. A S dividend has just been paid on these shares. This dividend amount is fixed every year for the next 5 years when the preference shares will be redeemed at a price of S10 per share. The preference shares are hybrid securities and the relevant rate of return for valuing these shares is 9% pa. Dividend payments are not tax deductible Network has 3000 Debentures on issue cach with a face value of $100. The maturity date for the debentures is 30 June 2014 The coupon is paid half yearly at a rate of 8% pa The current yield to maturity is 6% pa The company tax rates 30%. * Note & Hint: An instrument you may not have heard of before is a redeemable preference share. Redeemable means at some time in the future, the firm will essentially buy them back from the investor. They are often called a hybrid instruments as they are source of equity, but given a fixed dividend and a redeemimg feature they are priced like a bond.) Required: a) Determine the Weighted Average Cost of Capital (WACC) of Network Pty Ld Show all working in your answer. As a guide you will need to calculate the cost of debt, the cost of equity and the value of the debt and equity Remember to consider each of the following components in your value calculation: ordinary shares, preference shares and debentures b) Outline when it is appropriate to use the WACC you have estimated. Page 5 of 6Explanation / Answer
The review date is given as 1 July 2009 and the maturity date of debentures is given to be 30 June 2014.
This brings the maturity term to be 5 years.
The cash flows will be as under:
31 Dec 2010 : Coupon of $4
30 June 2010 : Coupon of $4
31 Dec 2011 : Coupon of $4
30 June 2011 : Coupon of $4
31 Dec 2012 : Coupon of $4
30 June 2012 : Coupon of $4
31 Dec 2013 : Coupon of $4
30 June 2013 : Coupon of $4
31 Dec 2014 : Coupon of $4
30 June 2014 : Coupon of $4+ FV of $100
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