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QUESTION TWO 1

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QUESTION TWO 1. The National Investment Bank (NIB) has 1 million shares of common stock outstanding with a market price of C12 per share. The firm's outstanding bonds have ten years to maturity, a face value of C5 million, a coupon rate of 10% and sell for €985 per 1000 in face value. The yield to maturity on the bond is 10% p.a. The risk-free rate is 7%, and the expected return on the market is 14%. NIB has a beta of 1.2, and the company is in the 34% tax bracket. Determine the i. Capital structure (4 marks) ii. Cost of equity (2 marks) iii. Cost of debt (1 marks) iv. WACC (3 marks) b. You have been given the following information: the market price of company A is C200 and that of B is C100. The number of shares of company A is 1 million and that of B is 500,000. Merging the two firms will allow for cost savings with a present value of c25 million. Firm A has decided to pay C65 million to acquire B. i. What is the market value of A? (2 mark) ii. What is the market value of B? (2 mark) iii. What are the gains from synergies? (1 mark) iv. Compute the cost of merger to firm A. (2 mark) v. What is the benefit of the merger to B? (1 mark) vi. What is the NPV of the merger? (2 mark) Total: 20 marks
a. MUCG's balance sheet contains the following information: Bonds (12% coupon, C1,000 face value, 5 years to maturity) (60 million Preferred stock (C5 dividend, 1 million shares outstanding) C10 million Common stock (10 million shares outstanding) C100 million The bonds pay interest annually and are selling at C1,075.82 to yield 10%. Preferred stock is selling for C38.50 a share and the common stock is selling for C12.00 a share. The beta of the stock is 1.15. The relevant treasury security rate is 5%, and the market is expected to return 14% next year. MUCG pays taxes at a rate of 39%. Calculate MUCG's: After tax cost of common stock ii. After tax cost of preferred stock iii. After tax cost of debt (3 marks) (3 marks) (3 marks) b. Suppose the Seven Eleven Printing Press is currently at its target debt-equity ratio of 100%. It is considering building a new C500,000 plant in Kumasi. The new plant is expected to generate after tax cash flow of C73,150 per year forever. The tax rate is 34%. There are two financing options: A C500,000 new issue of common stock. The issuance costs of the new common stock would be about 10% of the amount raised. The required rate of return on the company's new equity is 20%. A C500,000 issue of 30-year bonds. The issuance costs of new debt would be 2% of the proceeds. The company can raise new debt at 10%. i. What is the NPV of the new plant without flotation cost? (4 marks) ii. What is the NPV of the new plant with flotation cost? (6 marks) Should the project be undertaken? (1 mark) [Total: 20 marks