Question

BHP Billiton, an Australian company, just paid $0.85 as a dividend, which is expected to grow at 6.0 per cent. Its most recent stock price is $82. Further, the company has a debt issue outstanding with 23 years to maturity that is quoted at 95 per cent of face value.

The issue makes semiannual payments and has an embedded cost of 6 per cent annually. It considers a debt-equity ratio of 0.60 and a 25 per cent corporate tax rate.
This year, the company has an EBIT of $3.15 million. Depreciation, the increase in net working capital, and capital spending were $265,000, $105,000, and $495,000, respectively. Therefore, you expect that over the next five years, EBIT will grow at 15 per cent per year, depreciation and capital spending will grow at 15 per cent per year, and NWC will grow at 10 per cent per year. It also has $19.5 million in debt and 400,000 shares outstanding. After Year 5, the adjusted cash flow from assets is expected to grow at 3.50 per cent indefinitely.
Answer the following five (5) questions based on the above information and enter only the number as an answer, for example, 1234.56. Two (2) marks for each correct answer, a total of ten (10) marks.
What is the cost of equity (%)?
What is the post-tax cost of debt (%)?
What is the WACC (%)?
What is the value of the company ($)?
What is the price per share ($)?

Answer 1

To answer the questions, we need to perform various calculations based on the given information. Let's go step by step:

1. Calculate the dividend growth rate:
The dividend growth rate is given as 6.0% per year.

2. Calculate the cost of equity:
The cost of equity can be calculated using the Dividend Discount Model (DDM):
Cost of Equity = Dividend / Stock Price + Dividend Growth Rate
Dividend = $0.85, Stock Price = $82, Dividend Growth Rate = 6.0%
Cost of Equity = $0.85 / $82 + 6.0% = 1.0366%

3. Calculate the market value of equity:
The market value of equity can be calculated as the product of the stock price and the number of shares outstanding:
Market Value of Equity = Stock Price * Number of Shares
Stock Price = $82, Number of Shares = 400,000
Market Value of Equity = $82 * 400,000 = $32,800,000

4. Calculate the market value of debt:
The market value of debt can be calculated as the product of the debt issue outstanding and the quoted percentage of face value:
Market Value of Debt = Debt Issue Outstanding * Quoted Percentage
Debt Issue Outstanding = $19.5 million, Quoted Percentage = 95%
Market Value of Debt = $19.5 million * 95% = $18,525,000

5. Calculate the total market value of the firm:
Total Market Value = Market Value of Equity + Market Value of Debt
Market Value of Equity = $32,800,000, Market Value of Debt = $18,525,000
Total Market Value = $32,800,000 + $18,525,000 = $51,325,000

6. Calculate the debt-equity ratio:
Debt-Equity Ratio = Market Value of Debt / Market Value of Equity
Market Value of Debt = $18,525,000, Market Value of Equity = $32,800,000
Debt-Equity Ratio = $18,525,000 / $32,800,000 = 0.5647

7. Calculate the cost of debt:
The cost of debt is given as the embedded cost of 6.0% annually.

8. Calculate the weighted average cost of capital (WACC):
WACC = (Cost of Equity * Equity Weight) + (Cost of Debt * Debt Weight)
Equity Weight = 1 - Debt-Equity Ratio = 1 - 0.5647 = 0.4353
Debt Weight = Debt-Equity Ratio = 0.5647
Cost of Equity = 1.0366%, Cost of Debt = 6.0%
WACC = (1.0366% * 0.4353) + (6.0% * 0.5647) = 3.5683%

9. Calculate the net working capital (NWC):
NWC = Increase in NWC - Depreciation - Capital Spending
Increase in NWC = $105,000, Depreciation = $265,000, Capital Spending = $495,000
NWC = $105,000 - $265,000 - $495,