BUSN3049 Corporate Finance Major Assignment Please answer all questions as precise as possible. Each question caries equal marks. 1. You have been asked to estimate the cost of capital for Adelaide...

3 calculation questions


BUSN3049 Corporate Finance Major Assignment Please answer all questions as precise as possible. Each question caries equal marks. 1. You have been asked to estimate the cost of capital for Adelaide Enterprises, a company with a significant debt load, and a depressed stock price. You have the following information: The company has a book value of equity of $1 billion. There are 150 million shares, trading at $4/share. The unlevered beta of other companies in the same business is 1.20. The company has bank loans outstanding of $1 billion, with 5 years left to maturity and interest expenses of $40 million a year. The company currently has a CCC bond rating and has a default spread of 7% over the risk-free rate. The firm reported a net loss of -$15 million, but its operating income is expected to be $32 million next year. The risk free rate is 3%, the equity risk premium is 5% and the marginal tax rate for all companies is 25%. Estimate the cost of capital for the company, for next year. 2. Adelaide Inc. is examining its dividend policy and has provided you with the following information: 1 2 3 Revenues $1,200.00 $1,400.00 $1,600.00 Net Income $30.00 $70.00 $160.00 Total Non-Cash WC as % of Revenues 12.00% 9.00% 6.00% Dividend Payout 0.00% 10.00% 20.00% The non-cash working capital currently is $150 million and the company has a cash balance right now of $50 million. In the most recent year, depreciation amounted to $75 million and capital expenditures were $125 million. You expect depreciation to grow 10% a year and capital expenditures to increase 8% a year, each year for the next 3 years. Assuming that the company would like to double its cash balance by the end of year 3 and do a stock buyback in year 3, estimate how much cash the company will have available for its buyback. 3. You work for a small biotech company that has a 10-year patent for a Covid-19 vaccine that it plans to license to a larger pharmaceutical company and it has two offers: • Biogen has offered to pay $100 million today and $50 million a year, each year for the next 5 years. • Merck has offered to pay $50 million today and share 15% of net income, expected to be $400 million annually, each year for the next 10 years. The following table lists financing costs of Biogen and Merck: After-tax Cost of Debt Pre-tax Cost of Debt Cost of Equity Cost of Capital Biogen 3.75% 5.00% 12.00% 10.00% Merck 3.00% 4.00% 9.00% 7.50% Which offer would create more value for you? Preparation Please ensure that you are aware of the University’s Academic integrity policy. The lecture slides and textbook readings will give you the basic framework of the ideas, theories and concepts you will need to complete the assignment. These notes may not be sufficient on their own. You will need to make use of additional reading and extra references in preparing your assignment. When you are taking notes for your assignment,try and ‘translate’ what the author is saying into your own words. Don’t just copy out huge chunks from other people’s work, otherwise they will probably end up in your assignment with very little of the wording changed (which is plagiarism). Referencing All sources, whether academic books, journal articles, newspaper, material from the internet etc., must be cited in the main text of your assignment itself. Page 2