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You are going to analyze three companies in the Consumer Staples Industry

Finance

You are going to analyze three companies in the Consumer Staples Industry. The relevant information is presented in the following table. You expect that earnings before interest and taxes (EBIT) will remain constant of all three companies for the foreseeable future. The marginal tax rate is 30% for all companies. Bema has announced that it will issue debt and use the proceeds to repurchase shares. As a result of the announced program, Bema indicates that its D/E ratio will increase to 0.6 and its before-tax cost of debt will be 6%. Garth has announced that it plans to abandon the prior policy of all-equity financing by the issuance of $1 million in debt in order to buy back an equivalent amount of equity. Garth’s before-tax cost of debt is 6%

 

Aquarius

Bema

   Garth

EBIT ($)

600,000

600,000

600,000

D/E(market value)

0.6

0

0

Debt(market value)($)

2,000,000

0

0

S&P debt rating

A+

n.a.

n.a.

WACC

?

       10%

     10%

a. Calculate Aquarius’s WACC. (4 marks)

b. What is Bema’s WACC after the completion of its announced debt-financed share repurchase program? (8 marks)

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