Sasha Pty Ltd is a small company based in San Diego in the state of California in the United States. Management is considering a rapid expansion of its operations in the near future. The chief financial officer believes that discounted cashflow techniques are the best suited appraisal methods for their new projects. The most recent statement of financial position (formerly balance sheet) for Sasha is given below as follows: Authorised share capital (15 000 000 shares at 50c each) Issued share capital (10 000 000 shares at 50c) $ 5 000 000 Share premium Revaluation reserve Retained income Shareholders' funds 2340 000 1 610 000 4 615 000 13 565 000 12% irredeemable debentures 2 500 000 10% redeemable debentures 2 000 000 14% long-term loan 3 000 000 7 500 000 The shares of Sasha Pty Ltd have a current market value of $1.56 cum div. A dividend of 18 cents is due to be paid shortly. All debt interest is paid annually in arrears and has just been paid. Sasha has been growing at a rate of 5%. The CFO believes the company will be able to maintain this growth rate for the foreseeable future. The 12% debentures have a market value that is 80 per cent of the book value. The 10% debentures are to be redeemed in eight years' time at $95 per $100 nominal. The company has a current market required return of 16.67 per cent before tax. The 14 per cent loan is not traded on the open market, but its effective pre-tax cost has been estimated at 18 per cent. It is redeemable at par in three years' time. Sasha has a tax rate of 40 per cent. Required: a) Calculate the after-tax WACC of Sasha Pty Ltd. (28 marks) b) Outline the fundamental assumptions underlying the use of WACC as a discount within the context of Sasha Pty Ltd. (12 marks)
Sasha Pty Ltd is a small company based in San Diego in the state of California in the United States. Management is considering a rapid expansion of its operations in the near future. The chief financial officer believes that discounted cashflow techniques are the best suited appraisal methods for their new projects. The most recent statement of financial position (formerly balance sheet) for Sasha is given below as follows: Authorised share capital (15 000 000 shares at 50c each) Issued share capital (10 000 000 shares at 50c) $ 5 000 000 Share premium Revaluation reserve Retained income Shareholders' funds 2340 000 1 610 000 4 615 000 13 565 000 12% irredeemable debentures 2 500 000 10% redeemable debentures 2 000 000 14% long-term loan 3 000 000 7 500 000 The shares of Sasha Pty Ltd have a current market value of $1.56 cum div. A dividend of 18 cents is due to be paid shortly. All debt interest is paid annually in arrears and has just been paid. Sasha has been growing at a rate of 5%. The CFO believes the company will be able to maintain this growth rate for the foreseeable future. The 12% debentures have a market value that is 80 per cent of the book value. The 10% debentures are to be redeemed in eight years' time at $95 per $100 nominal. The company has a current market required return of 16.67 per cent before tax. The 14 per cent loan is not traded on the open market, but its effective pre-tax cost has been estimated at 18 per cent. It is redeemable at par in three years' time. Sasha has a tax rate of 40 per cent. Required: a) Calculate the after-tax WACC of Sasha Pty Ltd. (28 marks) b) Outline the fundamental assumptions underlying the use of WACC as a discount within the context of Sasha Pty Ltd. (12 marks)
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Sasha Pty Ltd is a small company based in San Diego in the state of California in the United States.
Management is considering a rapid expansion of its operations in the near future. The chief financial officer
believes that discounted cashflow techniques are the best suited appraisal methods for their new projects. The
most recent statement of financial position (formerly balance sheet) for Sasha is given below as follows:
Authorised share capital (15 000 000 shares at 50c each)
Issued share capital (10 000 000 shares at 50c)
$
5 000 000
Share premium
Revaluation reserve
Retained income
Shareholders' funds
2340 000
1 610 000
4 615 000
13 565 000
12% irredeemable debentures
2 500 000
10% redeemable debentures
2 000 000
14% long-term loan
3 000 000
7 500 000
The shares of Sasha Pty Ltd have a current market value of $1.56 cum div. A dividend of 18 cents is due to
be paid shortly. All debt interest is paid annually in arrears and has just been paid. Sasha has been growing
at a rate of 5%. The CFO believes the company will be able to maintain this growth rate for the foreseeable
future.
The 12% debentures have a market value that is 80 per cent of the book value. The 10% debentures are to
be redeemed in eight years' time at $95 per $100 nominal. The company has a current market required return
of 16.67 per cent before tax. The 14 per cent loan is not traded on the open market, but its effective pre-tax
cost has been estimated at 18 per cent. It is redeemable at par in three years' time.
Sasha has a tax rate of 40 per cent.
Required:
a) Calculate the after-tax WACC of Sasha Pty Ltd.
(28 marks)
b) Outline the fundamental assumptions underlying the use of WACC as a discount within the context
of Sasha Pty Ltd.
(12 marks)
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