Lecture11_Example1

Lecture11_Example1 - Its debentures are priced at $110 and...

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Lecture 11 Example WACC a. Calculate the WACC of Tristan Ltd, using the following information: Balance sheet extract Liabilities 10% debentures ($100 issue price) $150,000,000 Shareholders’ funds Paid-up capital – ordinary shares ($1 issue price) $50,000,000 Additional information Ordinary shares will pay a dividend of 66 cents at the end of this year, and dividends are expected to grow by 2.4% per annum indefinitely. Commonwealth government bonds trade at 4%. The return on the market portfolio is 12% Tristan Ltd’s beta is 1.3.
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Unformatted text preview: Its debentures are priced at $110 and pay coupons annually. The current return on Tristan Ltd debentures is 2% above the government bond rate. No company or personal taxes are levied. The existing capital structure is unlikely to change. b. Should Tristan Ltd go ahead with an expansion of their factory that costs $2 million today and will generate a cash flow of $350,000 per year for ten years? Show all computations and explain why you chose any additional numbers needed to make this decision....
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