You are engaged as a consultant to advice a company, MDIS PLC. Suppose you have data on four similar (or comparator) companies that operate in the same industry and are of similar size to MDIS. The data on the comparators' capital structure and cost of finance are summarized in the table below:
You also have information on the expected market return (Rm) = 13%, and the risk free
interest rate (Rf) = 2%.
The company operates in a country with no corporate taxation and zero inflation.
a) i. For EACH of the comparator companies that are similar to MDIS PLC (whose data are shown in the table above), find the cost of equity in terms of the required return on the stock of the company.
ii. For EACH of the comparator companies that are similar to MDIS PLC (whose data are shown in the table above), calculate the weighted average cost of capital (WACC).
b) i. Find the asset value of the company using the no-growth discounted cash flow approach assuming
• MDIS's latest annual cash flow (approximated by earnings before deducting interest) was £10 million per annum;
• annual cash flow can be assumed to remain constant for the indefinite future i.e., there is no reason to expect growth in cash flows;
• MDIS's weighted average cost of capital WACC can be approximated by the average of the WACC of the similar (comparator) companies.
ii. Given MDIS's debt-equity ratio of 35/65, calculate the value of MDIS's debt and equity.
c) Suppose MDIS's cost of debt is 12%, and its WACC is approximately the same as the average WACC of the comparator companies. Calculate MDIS's. cost of equity
ii. and its equity beta.