1. Calculate WACC of the company at current debt level. 2. Calculate expected price of BCL`s share in year 2020. 3. Find out the optimal level of debt for the company, using minimum WACC analysis
Bharat Consumers Limited has been in business for over 5 decades and has always placed equal focus on serving both consumers as well as shareholders. Over the years the company has built a diversified
portfolio of powerful brands, number of them being household names. The company requires from you estimates on its cost of capital for evaluating its acquisitions, investment decisions and the performance of its business. In addition to that the company also aim to setup a target capital structure and dividend pay-out policy (if residual policy is followed). Following are the exhibits reflecting important information to address the problem-at-hand
Exhibit – 1
The company considers, at present level, cost of debt as the effective rate of interest applicable to an ‘AAA’ rated company. It thinks that considering the trends over years, this rate is 9.5 percent in current year. The risk-free rate is assumed as the yield on long-term government bonds, which the company regards as about 8 percent. BCL regards the market-return is equal to about 11 percent. The company uses
Questions
1. Calculate WACC of the company at current debt level.
2. Calculate expected price of BCL`s share in year 2020.
3. Find out the optimal level of debt for the company, using minimum WACC analysis.
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