Question

Samos Company wanted to get listed for an IPO. The company wanted to maintain a capital structure in which 30% is finance by debt with the cost of debt of 8% and the rest with stockholder equity with required return of 12%. The company has projected its next year operating cash flow of RM70 million. Its investment into plant, property, and equipment as well as net working capital is RM40 million. It expected that its growth rate to be at 4% in perpetuity. The company’s tax rate is at 30%. Find the company’s

i.)Weighted average cost of capital.

ii.)The total value of Samos company

Answer 1

1) to find the weighted average cost of capital first we need to find the cost of each component (cost of debt and cost of equity)

cost of debt = interest rate - tax rate

= 8- 30% =5.6%

cost of equity = required rate of return = 12%

wacc = 30%(5.6)+70%(12)=10.08%

2)value of the company

free cash flow to the caompany = cashflow from operations + interest *(1-t) - net investment

=70+0.96(1-.30)-40

=30.672

value of the company = discounted value of cash flows= 30.672/10.08%-4%

=504.473