Tasks 1. Determine Tartan Knitwear’s: a. Cost of Debt b. Cost of Equity c. Beta

Question

Tasks
1. Determine Tartan Knitwear’s:
a. Cost of Debt
b. Cost of Equity
c. Beta
d. Weighted Average Cost of Capital (WACC).

Appendix 1- Balance Sheet (before machinery acquisition) Tartan Knitwear Limited Balance Sheet @ 30/07/18 Current Assets Current Liabilities Cash Accounts Receivables Inventory 5,000,000 1,000,000 1,000,000 Accounts Payables Tax Due 1,500,000 500,000 Non-Current Liabilities Bonds (@ face value) Bank Loan 30,000,000 5,000,000 Non-Current Assets PPE 90,000,000 Owners' Equity Issued Share Capital Retained Earnings 30,000,000 30,000,000 Total Assets 97,000,000 Total L+OE 97,000,000 Appendix 2 - Market Summary Data Company Tax Rate (t) Expected Market Return (rM) Risk Free Rate (rr) Bank Commercial Lending Rate (ro) | 28% 9.0% 2.5% 5.75% Appendix 3 -Market History Data Year NZX50 Index Tartan Share Price @31/7 (Adjusted Close(Adjusted Close) 2018 2017 2016 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 8921 7694 7348 5921 5168 4538 3545 3396 3034 3016 3336 4213 3581 3360 2788 2212 14.71 11.35 8.67 6.51 5.01 7.24 5.99 2.55 1.18 1.76 2.58 5.77 4.38 3.66 3.43 3.01

Explanation / Answer

2. Assumptions made to calculate Task1 are as below:

3. Change in the values for both the machines are as below, due to the variation in the riskiness compared to the company:

Payback period, NPV, IRR for Korean and German machines as below:

1.(a) Cost of Debt Amount Interest paid p.a Bond issue at 4.3% 30,000,000 1,290,000 Bank loan at 5.75% 5,000,000 287,500 Total 35,000,000 1,577,500 Cost of debt 4.51% 1.(a) interest paid/total long-term debt 1.(b) risk-free rate (rf) 2.50% expected market return (rm) 9% adj-beta 1.201 cost of equity (re) 10.31% 1.(b) 1.(c) beta 1.300 slope(Tartan,NZX50) adj-beta 1.201 NZX50 Returns Tartan 2212 3.01 2788 0.2603978 3.43 0.139535 3360 0.205165 3.66 0.067055 3581 0.0657738 4.38 0.196721 4213 0.176487 5.77 0.317352 3336 -0.2081652 2.58 -0.55286 3016 -0.0959233 1.76 -0.31783 3034 0.0059682 1.18 -0.32955 3396 0.1193144 2.55 1.161017 3545 0.0438751 5.99 1.34902 4538 0.2801128 7.24 0.208681 5168 0.1388277 5.01 -0.30801 5921 0.1457043 6.51 0.299401 7348 0.2410066 8.67 0.331797 7694 0.0470876 11.35 0.309112 8921 0.1594749 14.71 0.296035 1.(d) WACC weight-of debt in capital structure 0.361 rd 4.51% weight-of-equity in capital structure 0.619 re 10.31% tax-rate, t 28% wacc=we*re + wd*(1-t)*rd 7.55% 1.(d)

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