Question

The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in € thousands) is as...

The simplified balance sheet for the Dutch manufacturer Rensselaer Felt (figures in € thousands) is as follows:

Cash and marketable securities 2,300 Short-term debt 76,400
Accounts receivable 120,800 Accounts payable 62,800
Inventory 125,800 Current liabilities 139,200
Current assets 248,900
Property, plant, and equipment 212,800 Long-term debt 209,400
Deferred taxes 45,800
Other assets 88,200 Shareholders' equity 247,100
Total 595,700 Total 595,700


The debt has an interest rate of 4.00% (short term) and 6.00% (long term). The expected rate of return on the company's shares is 13.00%. There are 7.54 million shares outstanding, and the shares are trading at €54. The tax rate is 25%. Assume the company issues €50 million in new equity and uses the proceeds to retire long-term debt. Also assume the company's borrowing rates are unchanged and the short-term debt is permanent. Use the three-step procedure.

a. Calculate the cost of equity after the capital restructuring. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Homework Answers

Answer #1
Long-term debt € 209,400 33.96% 6.00%
Equity € 407160 66.04% 13.00%
616,560 100%
Re before Restructuring Re = (Rd*Wd) + (Re*We)
= ((0.3396*0.06) + (0.6604*0.13)
= 10.62%
Long-term debt € 159,400 25.85% 6.00%
Equity € 457160 74.15% 13.00%
616,560 100%
Re after Restructuring Re = R + (R - Rd) * (D/E)
= 10.62 + (10.62 - 6) * (159,400 / 457,160)
= 12.23%

.

Short-term debt € 76,400 11.03% 4.00%
Long-term debt € 159,400 23.00% 6.00%
Equity (7.57 million x $45) € 457,160 65.97% 13.00%
€ 692,960 100%
WACC after Capital Restructuing

= 0.04 (1 - 0.25) (0.1103) + 0.06 (1 - 0.25) (0.23) + 0.1223 (0.6597)

= 0.003309 + 0.01035 + 0.08068131

= 0.09434

WACC = 9.43%
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