RSM333 Assignment 2
Question 1 –Cost of Capital (15 marks) a)
i) From Annual Report
Adjusted net income=$3,827 million
Adjusted EPS=$3.82 Yes, shareholders should accept these figures. As mentioned in the annual report, management evaluates the components of adjusted net earnings based on an internal assessment of performance measures periodically. The adjusted net earnings enables investors and analysts to better understand the underlying operating performance or the company’s core mining business through the eyes of management, because the adjustments to net earnings in this measure include items that are recurring, and things such as nonrecurring tax adjustments, impairment charges, gains/losses and other onetime costs relating to asset acquisitions/dispositions and business combinations do not reflect the underlying performance of the company’s core mining business. ii)
Ke=0.04+0.64*(0.05)=0.072
iii)
Annualized dividend per share = 0.80 k=ROE=7.2% retention ratio =0.790576 g=ROE*bb=0.0569 Price=0.8*(1+0.0569)/(0.0720.0569)=56.076
Adjusted Closing share price for 2012 = 34.15
Thus the stock is undervalued. b)
105=6.95%/2*100*[11/(1+k)^12]/k+100/(1+k)^12
k=2.97%
Thus, YTM=2.97%*2=5.94% c)
Coupon rate= 5.94%
Cost of equity ke= 0.072
Debt= 12,095+1848 =13,943
Equity= 24,508
D/E=0.5689
D/V=0.3626, S/V=0.6374
Knewd = 0.0594(10.25)/0.995= 0.04477
WACC=0.072*0.6374+0.04477*0.3626=0.062
Question 2 –Mergers & Acquisitions (10 marks)
Question 2 – Mergers & Acquisitions
a) Equity Value of XYZ: 1*2.5 = $2.5 million Premium = (32.5)/2.5 = 20% or 32.5=0.5M
ABC Co.’s New Share Price: (20 + 2.5 – 3) / 1 = $19.5 The price of ABC will decrease by $0.5 per share, since the company is overpaying for the target’s current equity value → shareholders of ABC may worry about ABC’s future performance after the merger; On the other hand, price of XYZ will increase since ABC thinks XYZ’s current share are
i) From Annual Report
Adjusted net income=$3,827 million
Adjusted EPS=$3.82 Yes, shareholders should accept these figures. As mentioned in the annual report, management evaluates the components of adjusted net earnings based on an internal assessment of performance measures periodically. The adjusted net earnings enables investors and analysts to better understand the underlying operating performance or the company’s core mining business through the eyes of management, because the adjustments to net earnings in this measure include items that are recurring, and things such as nonrecurring tax adjustments, impairment charges, gains/losses and other onetime costs relating to asset acquisitions/dispositions and business combinations do not reflect the underlying performance of the company’s core mining business. ii)
Ke=0.04+0.64*(0.05)=0.072
iii)
Annualized dividend per share = 0.80 k=ROE=7.2% retention ratio =0.790576 g=ROE*bb=0.0569 Price=0.8*(1+0.0569)/(0.0720.0569)=56.076
Adjusted Closing share price for 2012 = 34.15
Thus the stock is undervalued. b)
105=6.95%/2*100*[11/(1+k)^12]/k+100/(1+k)^12
k=2.97%
Thus, YTM=2.97%*2=5.94% c)
Coupon rate= 5.94%
Cost of equity ke= 0.072
Debt= 12,095+1848 =13,943
Equity= 24,508
D/E=0.5689
D/V=0.3626, S/V=0.6374
Knewd = 0.0594(10.25)/0.995= 0.04477
WACC=0.072*0.6374+0.04477*0.3626=0.062
Question 2 –Mergers & Acquisitions (10 marks)
Question 2 – Mergers & Acquisitions
a) Equity Value of XYZ: 1*2.5 = $2.5 million Premium = (32.5)/2.5 = 20% or 32.5=0.5M
ABC Co.’s New Share Price: (20 + 2.5 – 3) / 1 = $19.5 The price of ABC will decrease by $0.5 per share, since the company is overpaying for the target’s current equity value → shareholders of ABC may worry about ABC’s future performance after the merger; On the other hand, price of XYZ will increase since ABC thinks XYZ’s current share are