Question

ABC 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

Required:

1) Weighted average cost of capital.

2) The total value of ABC company

Answer 1

a. Weighted average cost of capital (WACC)=(weight of debt*after tax cost of debt)+(weight of equity*cost of equity)

after tax cost of debt=cost of debt*(1-tax rate)=8%*(1-30%)=5.6%

weight of debt=30%

weight of equity=70% (1-30%)

Weighted average cost of capital (WACC)=(30%*5.6%)+(70%*12%)=10.08%

b. Free cashflow to the firm=Operating cashflow-Investments in assets and working capital=70 million-40 million=30 million

growth rate=4%

Value of the company=Free cashflow/(WACC-growth rate)=30/(10.08%-4%)=493.4 million