Calculations Bonds Outstanding, Price per Preference Share - 1100 Words

Calculations: Bonds Outstanding, Price per Preference Share (Essay Sample) Content: Question 1Item Value Item Value bonds outstanding $3,220,000,000 price per preference share $97.77 bond years 10 Bank loan $555,000,000 bonds trading at $102.50 interest rate pa 4% par value $100 tax rate 30% ordinary shares 696,000,000 risk premium 6% price per share $15.34 Risk free rate 2.52% preference shares 5,000,000 beta 0.61 par value of preference shares $100   * Calculation of the trading value per bondThe bonds are trading at 102.5% of the par valueThat is 102.5%ÃÆ'$100 = $102.50 per bond * Identification of the beta of New Crest Mining LimitedFrom YahooFinance = 0.61 * Identification of risk free rate from the 10 year bond ratesMonthly bond rate = 2.52 * Calculating CAPMra=rf+ÃŽÂ ²a(rm-rf)Where rf= Risk free rateÃŽÂ ²a = Beta of the securityrm = Expected Market returnrm-rf = premium rateRisk free rate = 2.52%Risk premium = 6%Beta = 0.61Substituting the valuesra=2.52%+0.61(6%) = 2.52% + 3.66% = 6.18%CAPM = 6.18% * Calculating the cost of c apitalThe formula for calculating the cost of capital is the combined cost of debt and equity that has been acquired by a company so that it can fund its operations. The cost of capital takes into account the cost of debt, common stock and preferred stock. The formula for the calculation of the cost of capital involves many different calculations of the three different componentsThe cost of debt is calculated as:Interest ExpenseÃÆ'(1-Tax Rate)Amount of Debt OutstandingThe interest expense is calculated as debt multiplied by debt rate$555,000,000 ÃÆ'4% = $22200000Additional interest expense is the carrying value of bonds multiplied by half of the annual yield to maturity = $3,220,000,000 ÃÆ' 102.50/2 = $1650250000The amount of debt outstanding isSubstitution of the values gives($22200000+$1650250000) ÃÆ'(1-30%)555,000,000+322000000027091750003775000000= 0.72%The cost of preferred stock is calculated as:Interest ExpenseAmount of preferred stockPreferred shares = 5000000ÃÆ'$97.77 = $4888500002709175000488850000= 5.54%The cost of common stock involve the risk free return, the average rate of return expected and a differential risk return.Risk Free Return+(BetaÃÆ'Average Stock Return-Risk Free Return)Average Stock Return à ¢Ã¢â€š ¬ Risk Free Return = Market Premium Risk2.51% + (0.61 ÃÆ' (6%))=6.18%The common stock funding = ordinary shares multiplied by the price per share= 696,000,000 ÃÆ' $15.34 = $10,676,640,000All the three calculations have to then be added together and their weighted average calculated to get the blended cost of capital for the company. The cost of each item is multiplied by the amount of outstanding funding that is associated with it.Total Debt Funding ÃÆ' Percentage Cost = Dollar Cost of Debt Total Preferred Stock Funding ÃÆ' Percentage Cost = Dollar Cost of Preferred Stock Total Common Funding ÃÆ' Percentage Cost = Dollar Cost of Common Stock = Total Cost of Capital Funding Type Funding Amount % Cost Dollar Cost Debt $37750000 00 ÃÆ' 0.72% = $27,180,000.00 Preferred Stock $488850000 ÃÆ' 5.54% = $591,485,856.00 Common Stock $10,676,640,000 ÃÆ' 6.18% = $30,210,930.00 Totals $14,940,490,000 ÃÆ'12.44% = $648,876,786.00 From the table, the cost of capital of the company is $648,876,786.00.Question 2 * Disadvantages of total distribution model in valuing sharesValuing shares by use of the distribution model can lead to misleading results since the amount of profit that has been accrued by the company would be too little and not appear significant. This can have a great influence on the investors and the choices they would make concerning the business. * Calculating theoretical share value as at 31st Dec. 2015.Free Cash Flow to the Firm (FCFF) is calculated asEBIT (1-tax rate) + non-cash charges (income) à ¢Ã¢â€š ¬ capital expenditures à ¢Ã¢â€š ¬ working capitalUsing the Discounted Cash Flow model for a non-constant growth is given by the formulaAssuming that the free cash flow is expected to grow indefini tely at a constant rate, the formula becomesValue of firm=FCFF1rf-gThe rf is the cost of capital to the firm, r is the appropriate cost of capital, t is the time period, and g is the estimated growth rate.Assuming that the cash flow is expected to grow at a rate of g1 for time t1 and to g2 later on, the formula used isrc is the weighted average of the cost of capital.The cash flow from operations is $837,000,000Capital expenditures $541,000Net income $546, 000The capital value $648,876,786.00EBIT $1,066,000,000Since it is assumed that there are no non-cash charges, we substitute the values asThe Free Cash Flow to the firm (FCFF) = $1,066,000,000-$541,000-$648,876,786.00Free Cash Flow is equal to $416,582,214Estimated growth rate is calculated by subtracting the current EBIT from expected EBIT then divided by the current EBIT and multiplied by 100%That is ($2000m-$1066m)/$1066mÃÆ'100% = $934m/$1066mÃÆ'100% = 87%This is then divided by 5 to get the estimated growth rate per year = 8 7%/5 = 17.4%The rate in cash would then be 17.4% multiplied by the current value= 17.4% ÃÆ'$1066m = $185.484mThe current value of firm is calculated asValue to the firm=(1-rc)t1FCFF0(1-g)t(1+rc)t1+[FCFF0(1+g1)t1/(rc-g2)(1-rc)t1]Since the values are expected to remain constant, the values will be,Value of firm=$416,582,214$648,876,786.00-$185484000The Current value of the firm is = $ 0.90 * Multiplier method of valuationEPS = $0.81Price per share/market value per share = $15.34Earnings Multiplier = Market value per share/Earnings Per Share (EPS)= $15.34/$0.81= $18.94This is much more than the $0.90 calculated in (b).The difference is because of the fact that the earnings multiplier does not take into account the details of the company and the interests and other expenses, which are closely monitored by the discounted cash flow model. * Recommendations for buying shares in NewpeakAs reflect...