Question

The shortened version of the Peipsi Koola Inc. income statement for the financial year 2019 is as follows (in million EUR):

EBIT                                                     90

Interest expense                                 20

Earnings before taxes (EBT)                70

Taxes  (on profits)                               15

Net income                                          55

The company has 5 million shares outstanding. The shares are currently trading at the level of P/E (price earnings ratio) = 10 times. The company has released the following forecasts: Dividend payout ratio is going to be 80% of net income. Expected (long-term) growth rate of net income is 4% p.a. The company also uses bank financing quite extensively. The level of debt has been quite stable recently and has remained at the level of 250 million EUR for quite some time. The company is going to issue new debt if necessary in order to maintain the current D/E ratio also in the future.

Questions:

a)      Find the required return from equity and debt

b)      Find the value shares of debt and equity

c)      Calculate the cost of capital (WACC)