WACC

Question 1

Calculating growth rate

Answer 1

🔺Net income/ Total equity
* retention ratio
🔺ROE * (1-dividend payout ratio)/ ROE * retention ratio

Question 2

EPS

Answer 2

Net income/ # of shares

DPS * Dividend cover

Question 3

Calculating

1. D0
2. D1

Answer 3

1. EPS* dividend payout ratio% or,
   - Dividend cost/ # of shares in issue

• D0*(1.08) growth rate=D1
  2. D0 (1+g) /market price or CAPM-Growth%

Question 4

General principles (WACC)

Answer 4

🔹Finding interest:
P/Y =2. Then move it from nominal to effective rate

• Convert if you’re the holder and outcome is high, then find PV. Convertible at issuer option therefore expect lower value and calculate PV
  1. No dividends for first 5 years therefore n=5, PMT= 0

2. If D:E not given. (MV debt+MV equity) = Enterprise value
   If told WACC should be 20% higher, then WACC * 1,2
3. Do not deduct floatation cost no new share issued
4. What changes is P/Y, N, PMT
5. No plan to replace loan do not include in WACC
6. No repayment terms, it is a perpetuity
   FV per share* coupon %/mv
7. Operating lease not used in WACC
8. Beta is expected rate in the market

Question 5

1. Market value

2. Coupon

Answer 5

1. MV = coupon%/market%*nominal value

2. PMT/MV = interest

Question 6

CAPM

Answer 6

Unlevered beta:
beta/ (1+(1-28%)*D:E peers)

Relever beta:
beta * (1+(1-28%)* D:E company)
-Risk adjustment of beta

1. Rf- bond yield (1st one in CAPM calculation)
   - use risk free rate if not use government bonds

Question 7

Share price

Answer 7

PE ratio * EPS

Question 8

Beta

Answer 8

1. Move in share price%/Move in JSE%

2. Market capital return: close-open/open + average dividend yield at JSE

Question 9

Dividend Growth Model

Answer 9

-Growth ROE: net income/share equity

• Retention ratio (1-dividend payout ratio %)
• Redeemable prefs not part of SH/H equity

Question 10

Ke

Answer 10

= Dividend yield + g

Dividend yield = 100- retention ratio % * EPS cents * (1+g) / MP share cents

Question 11

1. Finding PV
2. Finding FV
3. Finding PMT

Answer 11

1. • 14% semi annual dentures 50000 at R50 each. Market price R63,50, premium is 35%

R50*14%/2 = 3,50

50000/R50 = 1000(63,50-3.50)
= R60000

2. R501.351000 = R67500
3. R5014%/2 = 3,501000 = R3500

Question 12

Long term 15% nominal per annum 20000

Answer 12

• MV = 20000*1.15 = 23000

Question 13

Preference shares @ R107 cum dividend. Prefs 11% issued at par = R100 each

Answer 13

• R100* 11% = R11
  R107 -R11 = R96* # of shares * 97% = MV

Cost = R11/96*97% = 11,81%

Question 14

Issued 5 years ago at 60%

Answer 14

R130m/40% = R325m

R325m/share price = # shares issued

Question 15

Convert at end 3 years into 650000 ordinary shares par = R25 each, i = 8%
SFP (R40m -400000, 7%, prefs at R100) dividend per share = R4, g= 5%, currently trading @ R50

Answer 15

R4/R50 + 5% = 13%

D1 = 4* 1.05^3 = 4.6305

4.6305/13-5 = R 57.88*#shares = convert

No convert: 400000R100= R4m7% = 2800000/8%. = xxxx

Do TVM calculation using higher value if holder.

Question 16

Why not necessary to calculate WACC

Answer 16

• Target capital structure remained unchanged during the period.
• Tax rates remained unchanged.
• No new instruments were issued or redeemed during the period.
• Market rates and thus the costs of capital/ financing did not change materially.
• The risk profile of 1Time did not change significantly during the period.
• The market value of 1Time shares did not change materially.

Question 17

Credit downgrade impact (WACC, Valuation and Debt covenants)

Answer 17

• WACC will be affected by an increase in the cost of debt, as more interest is charged, this increases the financial risk of the company, which increases the Beta
• The customers are put under more pressure, resulting in less revenue and more bad debts
• The value of the company will decline, as there are less profits, discounted at a higher rate.
• The interest cover ratio will deteriorate significantly as the interest increases and the profits decrease
• The loan to market value ratio will also deteriorate, as the market value of the company declines while loans will increase as the company needs to borrow to stay in business