AnimalChin! is a well-established company. Because of its market share and a fairly stable revenue stream, 9 years ago they successfully issued 25-year maturity 7% bonds, paying semiannually. Today, these bonds are selling for 97% of their face value. The total face value of these bonds is $3.4 billion. The company also issued 8% convertible bonds, paying semiannually, trading at 106% of their face value, maturing in 15 years. The total face value of these bonds is $2 billion. Finally, they just received a $1.7 billion term loan from a bank, the bank is currently charging a 6% interest on the loan. AnimalChin is publicly-traded. Today, its common stock trades for $40 per share. There are 1.5 billion shares outstanding. Its preferred stock is trading at $25 and just paid a dividend of $2.5. There are 0.9 billion preferred shares outstanding. The five financial analysts currently covering the company expect AnimalChin to grow at a similar pace as the whole skateboarding sector: about 5%. The last dividend paid on common stock was $3 per share. The company’s most recent estimated beta is 1.4. The risk-free rate is 3% and the expected market risk premium 7%. For the Veloce project the company’s CFO has decided to apply an adjustment factor of 1.4% to the company’s WACC to account for additional risk.
1) Calculate Animal Chin’s cost of all debt and the after-tax cost of debt.
2) Calculate Animal Chin’s average cost of equity.
3) Calculate Animal Chin’s cost of preferred.
4) Calculate the market value of debt, equity, preferred, and the company’s total market value.
5) Calculate the WACC.
6) Use the appropriate discount rate (subjective approach) and calculate the project NPV, IRR, and payback period (this is based on your CFFAs from Part 1).
7) Elephant Skateboards just approached your company and is willing to pay $250,000,000.00 today to have the right to produce and sell The Veloce as its own. Should Animal Chin! accept the offer? Explain why in light of your capital budgeting findings.