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(solved) Assignment on Business Finance

   

Added on  2020-09-17

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Business Finance – Group ReportMay 12, 2019WACC Calculation, Investment Selection and Asset Pricing Model analysisQuestion 1:Find the appropriate risk-free rate and calculate the WACC of your parent company. Making an adjustment to WACC that takes into any additional risks the parent company might confront from this investment.Financial ExtractAdditional information that we foundOrdinary share price (closing price on March 29, 2019)$57.38 (NASDAQ)Risk-free rate (appropriate rate on March 29, 2019) (Rf)2.4% (Ychart)Beta (the most recent beta reported by the company) 0.5 (Reuters)Corporate tax rate (tax rate as of January 1, 2018)21% (Deloitte) Fed Funds Rate (2019)2.5% (FED)Preference shares price (trading at 50% below the ordinary share price)$28.69pg. 1

Business Finance – Group ReportMay 12, 2019Convertible preference shares price (trading at 30% below the ordinary share price)$40.166Current interest rate on the property mortgage (2% on top of the current Fed Funds rate)4.5%Bank overdraft current rate (3% above the Fed Funds rate)5.5%Term loans current interest rate (3.25% above the current Fed Funds rate)5.75%Current interest rate on equipment (chattel) mortgage (2.25% on top of the current Fed Funds rate)4.75%Current return on Kellogg Company debentures (5%on top of risk-freerate on March 29, 2019)7.4%Market Return (Rm)11.72%Country Risk Premium (in Vietnam) 5%Notes 1.Market Return is the annualised return as calculated from monthly returns of the last twelve months using Market Index (Rm) where Rm,t = ln(Pt/Pt−1) (Rm,t is the market return at month t, Pt is the price at month t and Pt-1 is the price of the previous month t-1, ln is the natural logarithm). 2.The interest rate on the property mortgage was 5.50% at the time of the loan. It has ten years remaining.3.Term loans mature in 5 years. Term loans originally had a 6.25% interest rate.4.The interest rate on equipment (chattel) mortgage was 5.75% at the time of the loan. It has seven years remaining.5.Debentures are due in 15 years.6.Interest is paid quarterly on all Kellogg Company debt (except commercial bills)★Market Return CalculationWe select the closing price of stocks on NASDAQ stock market for 1 year (from 30 April 2018 to 30 April 2019) (Yahoo Finance) pg. 2

Business Finance – Group ReportMay 12, 2019NASDAQ historical index30 April$7,066.2731 May$7,442.1229 June$7,510.3031 July$7,671.79August 31$8,109.5428 Sep$8,046.3531 Oct$7,035.9030 Nov$7,330.5431 Dec$6,635.2831 Jan 2019$7,281.7428 Feb 2019$7,532.5329 Mar 2019$7,729.3230 Apr 2019$8,095.39Closing price from 30 April 2018 - 30 April 2019Table 1. Closing price of stocks on NASDAQ stock market for 1 year-Formula of Log Return to calculate monthly returns NASDAQ historical indexMonthly returns30 April$7,066.275.18%31 May$7,442.120.91%29 June$7,510.302.13%31 July$7,671.795.55%August 31$8,109.54-0.78%28 Sep$8,046.35-13.42%31 Oct$7,035.904.10%30 Nov$7,330.54-9.96%31 Dec$6,635.289.30%31 Jan 2019$7,281.743.39%28 Feb 2019$7,532.532.58%29 Mar 2019$7,729.324.63%30 Apr 2019$8,095.39Closing price from 30 April 2018 - 30 April 2019pg. 3

Business Finance – Group ReportMay 12, 2019Table 2. Monthly returns-Formula for calculating monthly average market returnCalculate nominal yearly market return = 0.93% * 12 =11.14%-Effective market rate of return (take into account the monthly compounding) Effective rate = (1+11.14%12¿¿12– 1 = 11.72% Therefore, the final result of market return is 11.72%All calculations of monthly returns and market return are performed in MS Excel. NASDAQ historical indexMonthly returnsMonthly average market returnNominal yearly market rate of return Effective market rate 30 April$7,066.275.18%0.93%11.14%11.72%31 May$7,442.120.91%29 June$7,510.302.13%31 July$7,671.795.55%August 31$8,109.54-0.78%28 Sep$8,046.35-13.42%31 Oct$7,035.904.10%30 Nov$7,330.54-9.96%31 Dec$6,635.289.30%31 Jan 2019$7,281.743.39%28 Feb 2019$7,532.532.58%29 Mar 2019$7,729.324.63%30 Apr 2019$8,095.39Closing price from 30 April 2018 - 30 April 2019Table 3. Market rate of returnWACC calculation (Interest is paid quarterly on all Kellogg Company debt)Step 1:Calculate Market Value of each componentLiabilities1.Bank overdraftMarket value: $55,000,0002.Term loans mature in 5 years.pg. 4

Business Finance – Group ReportMay 12, 2019PV = Annual interest x [1−(1+r)−nr] + Loan amount x (1+r)−nHistorical interest rate = 6.25%Current interest rate = 5.75%Number of terms of payment: n= 5x4= 20Annual interest = $135,500,000 x 6.25%4 = $2,117,187.5PV = $2,117,187.5 x (1−(1+5.75%4)−205.75%4) + $135,500,000 x (1+5.75%4)−20 = $138,425,933.6pg. 5

Business Finance – Group ReportMay 12, 20193.Debentures due in 15 yearsDebentures market value = PV of coupon payments + PV of face valueCoupon rate: 10%Current return= 7.4% -> 7.5%4 = 0.0185Number of terms of payment: n= 15x4= 60PV of coupon payments= ($1000 x 10%4) x 1−(1.0185)−600.0185 = $25 x 1−(1.0185)−600.0185= $901.462PV of face value = $1,000(1.0185)60= $332.92=> Debentures = $901.462+ $332.92 = $1234.379967=> Total market value of debentures = $500000000$1000x $1234.379967 = $617,189,983.74.Property mortgage Kellogg Company records a property mortgage amount of $375,000,000 with the interest rate at 5.5%, and will berefinanced on today at the rate of 4.5% (2% above the Fed Funds rate), paying in quarterly method, remaining up to 10 years. ●Historical interest rate = 5.5%●Current interest rate = 4.5%●Number of terms of payment: n= 10x4= 40Quarterly payment = PMT = $375,000,0001−(1+0.0554)−400.0554 = $12,250,990.47Present value of property mortgage = PMT x ¿]= $12,250,990.47 x 1−(1+0.0454)−400.0454 = $392,867,856.9pg. 6

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