F9 2 questions that I am struggling with

Hi,

I was wondering if you could help me with the following questions.

Q1

Given below are extracts from the annual accounts of four listed companies, together with information concerning their stock market performance. Companies A and B are from the brewing sector and have as their principal business activities, brewing beer, wholesale and reatil selling of beers, wines and spirits and soft drinks and the ownership and management of public houses. The principal activities of companies C and D are the distribution and service of electronic components, microprocessor systems and related equipment. Company D is also involved in the manufacture of steel products as partitions and lintels.

20×8: ANNUAL REPORT EXTRACTS COMP A B C D
Ordinary s/holders fund #($m) 90.4 65.4 5.9 33.33
Long Term Loan ($M) 0.1 0.3
9% Bond ($M) 1.1
BANK OVERDRAFT ($M) 1.7 5.6 1.1 0.7
NET DIVIDEN PER SHARE (C) 4.3 8.2 2.4 9.9
ANNUAL DIDVIDEDN GROWTH SINCE 20X4 12% 10% 19% 22%

STOCK MARKET DETAILS ON 31 MAY 20XP
EQUITY MARKET VALEU ($M) 68 63.2 68.8 123.4
SHARE PRICE ($) 1.64 2.80 3.03 4.70

The pre tax cost of debt for companies that have long term loan is 12% The bonds for company A are undated and are currently trading at $80 per $100 nominal. Assume that Company A issued the bonds one year ago to finance a new investment.

a- Using the dividen valuation model calculate Weighted average cost of capital for each companies, assuming a tax rate of 45% and ignoring bank overdafts. Explain why WACC differ betwen 4 companies.

Q2

X is a telecommunications business that has invested heavily in new technology in recent years. The new technology has been financed through long term borrwing which has proved to be a financial burden as profits have not grown as quickly as expected. The company has 5 Million $0.25 ordinary shares and $20 million loan capital. The borad of Directors has decided to reduce the burden of debt by raising $10 million through a right issue and then using the amount raised to redeem some of the loan capital.

Profits after tax for year to 31 May 20×2 were $6.0 million and the board expects to achieve a 20% increase in this figure in the forthcoming year, assuming the right issue is successful and operational targets are met. The board has recently committed the company to a dividen payout ratio of 25% for future years and believes that dividend growth can be sustained at 4% pa for the indefinite future.

The board believe that the right shares should be issued at 40% discount to the current market value in order for the issue to be successful, bearing mind the level of efficiency they believe the stock market to have. For calculation purpose share issue costs can be ignored.

Shareholdrr have required rate of return is 10%

a- calculate total market value of share of the company, using the dividen forecast, assuming a successul right issue is made.

b- calculate:
1 The price at which a rights shrare in the company should be issued and
2- The number of right shares that should be issued to raise the finance required.

Many thanks,
Zubeyde Hunt
Email zubeyde.hunt@sky.com