Question

question a i ii iii

16. ChargeBank Plc is a battery manufacturer with securities listed on a large exchange. The company has the following capital structure: £m £m Equity Common shares (£1 per share nominal value) 12 Reserves Debt 5% Unsecured bond (£100 nominal value) 15 year bank loan 150 55 205 Total equity and debt 297 The common shares have a beta of 1.2. The risk-free rate is 3% and the return on the market portfolio is 8%. The next dividend, payable in one year's time, will be £0.65 per share. The directors of ChargeBank Plc expect to increase dividends at a rate of 4% per year. The unsecured bond is a 30 year-term bond, and was issued 6 years ago. The bond pays an annual coupon of 5%. The current yield-to-maturity is 5.75%, and the current market price of the bond is £90.12. The bank loan is secured against a warehouse facility and has a fixed interest rate of 6% per year. The loan was issued 9 years ago. The marginal rate of corporation tax faced by the company is 20%. Required: a) Calculate the following values for ChargeBank Ple: i. ii. iii. The current share price, using the dividend growth model; (7 marks) The after-tax cost of debt for the unsecured bond; (4 marks) The current weighted average cost of capital, using market values. (9 marks)

Answer 1

i) Caculation of Current Share price Using Dividend Growth model Current Share Price = D1/ K-g Caculation of k using CAPM model k = Risk free rate+ beta ( Market return - Risk Free rate) 0.03+1.2*(.08-.03) 9% Given Divivdend = .65 Growth rate = 4% Current Share Price = D1/ K-g ='0.65/0.09-0.04 £ 13.00 Therefore current share Price = £ 13.00 ii) Caculation of after tax cost of Debt Unsecured Bond Cost of Debt unsecured before tax = 5.75% Tax rate = 20% Cost of Debt unsecured after tax = 5.75%-(5.75%*20%) 4.60% iii) Caculation of Current Weighted Average Cost of Capital WACC = ke* Equity/(Equity+Debt) +kd(1-t) *Debt/Equity+Debt Market value of common stock = Outstanding shares * Market share = 12000000*£ 13 £ 15,60,00,000.00 Market value of Debt = Outstanding Bond * market value (150000000/100)*90.12 £ 13,51,80,000.00 Bank Loan = £ 55000000 Total Funds = 156000000+135180000+55000000 £34,61,80,000.00 WACC = 0.09*(156000000/346180000) +0.046*(135180000/346180000) +0.06(1-0.2)*(55000000/346180000) 6.61%

i) Caculation of Current Share price Using Dividend Growth model Current Share Price = D1/ K-g Caculation of k using CAPM model k = Risk free rate+ beta ( Market return - Risk Free rate) 0.03+1.2*(.08-.03) 9% Given Divivdend = .65 Growth rate = 4% Current Share Price = D1/ K-g ='0.65/0.09-0.04 £ 13.00 Therefore current share Price = £ 13.00 ii) Caculation of after tax cost of Debt Unsecured Bond Cost of Debt unsecured before tax = 5.75% Tax rate = 20% Cost of Debt unsecured after tax = 5.75%-(5.75%*20%) 4.60% iii) Caculation of Current Weighted Average Cost of Capital WACC = ke* Equity/(Equity+Debt) +kd(1-t) *Debt/Equity+Debt Market value of common stock = Outstanding shares * Market share = 12000000*£ 13 £ 15,60,00,000.00 Market value of Debt = Outstanding Bond * market value (150000000/100)*90.12 £ 13,51,80,000.00 Bank Loan = £ 55000000 Total Funds = 156000000+135180000+55000000 £34,61,80,000.00 WACC = 0.09*(156000000/346180000) +0.05*(135180000/346180000) +0.06(1-0.2)*(55000000/346180000) 0.07 6.77%