Cost of capital (WACC) each project

Ssoshilata5y ago

i would like to ask some question : please refer below question ABC ltd current business is textile industry MVe : 114m MVd: 58.24m beta equity : 1.2 ABC ltd is planing to expand existing operation and also diversified to new packaging industry. packaging industry's beta asset :1.12 ABC ltd will borrow 4.725m (11% ) bank loan for expansion of textile and for packaging investment with a right issue 9.275m at a discount of 10% the market price. rfr :6% market return : 14% tax : 33% determine an appropriate discount rate and use for each of these projects (my SOLUTION) since the company gearing level didnt change so i may use adjusted WACC (package) and WACC (textile) for packaging 1st regeared the packaging beta asset to ABC ltd and it will be 1.51 beta equity and apply to ke = 6+1.51(14-6) so ke = 18% well, here i stop, because i no sure how to deal with kd, because the question said they will right issue for packaging 9.275m but the loan of 4.725 is for expansion textile, if let said bankruptcy risk is normally for these two project, then how about WACC for textile, since they specific the initial investment for diversifeid and expansion. should i include the 9.275m in MVe of textile when calculate the WACC for textile? if not it will change the gearing level. moreover, did the right issue 9.275m at a discount of 10% will affect anything? should we ignore the existing or past MVe and MVd, when the question ask about evaluate the project(future) for eg : when i calculate WACC, should i use MVe as (114m +9.275m) or just (9.275m) ?

John MoffatTutor5y ago#1

Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA approved publishers - they have answers :-) Since the level of gearing does stay the same, you would use the same gearing ratio for both the current and the new WACC. You can only assume that the cost of the exiting debt is the same as the cost of the new debt since it does not seem to be given in the question. The fact that the new debt is for expansion of textile and the new equity is for the packaging investment is irrelevant because there is still only one company. Whatever their thinking was in raising the new finance, all of the new finance is for the company as a whole.