1. Investigate and calculate the cost of equity of the target company Wescoal Mi
ID: 2821148 • Letter: 1
Question
1. Investigate and calculate the cost of equity of the target company Wescoal Mining limited?
- estimate the beta of the company (Wescoal), making use of gearing and ungearing betas in reference to Exxaro resources beta? Risk free rate of return (Rf) is 7.98% and Market Return is 10.79% . Exxaro Beta is 1.08
STATEMENT OF FINANCIAL POSITION (GROUP) As at 31 March 2017 2016 in Rands ( (R'000) ASSETS Non eurrent assets Investment property Property, plant and equipment 209 496 350 3 637 22 664 11 366 4 372 641 198 Intangble assets Prepaid royality 542 9 533 36 654 12 Oeher receivable 2 021 6 739 818 273 1 272 631 121 Prepaid royalty 57 668 280 647 84 411 Trade and other recevables Cash and cash equivalent Restricned cash 16 01 179 73 584 Non-cument assets held-forsale 773 534 1 591 857 388 848 1019 969 EQUITY AND LIABILITIES Equity attributable to equity holders of parent Share capital Share-based payment reserve Retained income 8 676 175 734 684 632 213 156 263 64 642 385 061 Total equity Non-current liabilities Instalset sale agreements Other financial liabilities Delerred tax 2 907 19 306 46 186 18 533 85 932 21 77 918 Current Iliabilities Cutrent tax pyable Instalment sale agreements Other financial labliies 27 585 2 856 13 486 2 355 1019 9365 35 13 890 272 578 215 286 15 781 Tade and other payables Interest-bearing borrowing Bank overdraft 21 16 254 121 17 098 629 307 47 976 1 591 g 969 Total equity and liabilities 2 WESCOAL Integrated report for the year ended 31 Marth 201Explanation / Answer
We have been given the unlevered (ungeared) beta of Exxaro to be 1.08. We assume that the unlevered beta of Exxaro is equal to the unlevered beta of Wescoal mining since all firms within the same industry will have the same unlevered beta. Based on the individual debt levels, the firm’s equity beta can be calculated
So, unlevered beta of Wescoal mining = 1.08
We use the Hamada equation to calculate the equity beta of Wescoal mining
Equity beta = Unlevered beta *(1+(1-tax rate)*Debt/equity)
Debt = 219,330 and equity = 524,984 (from the balance sheet given)
Tax rate is assumed to be 35% (for corporations)
Equtiy beta = 1.08*(1+(1-0.35)*219330/524984)
Equity beta = 1.3733
As per CAPM cost of equity = Rf + beta*(Rm - Rf) = 7.98 + 1.3722*(10.79-7.98) = 11.83897%
The cost of equity of the target company Wescoal Mining limited = 11.84% (Rounded to 2 decimals)
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.