The Weighted Average Cost of Capital (WACC) of the Company - Accounting and Finance Assignment Help

Assignment Task

Question 1
a) The below information is extracted from the balance sheet of ABC Shipping AsiaLtd.

Additional information:

• The ordinary shares are currently traded at $5.00 pershare.
• The beta coefficient of ABC Shipping Asia Ltd is1.5.
• The risk free rate (a 10-year government bond) in the market is3%.
• The average historical market premium for the past 10 years is8%.
• Its debentures are priced at$102.
• Its preference shares are trading atpar.
• The current return (i.e. market yield) on the company’s debentures is 8%.
• Company tax is30%.
• The existing capital structure is unlikely tochange.

Calculate the Weighted Average Cost of Capital (WACC) of the company.

b) ABC Shipping Asia Ltd is planning to add one new container vessel to its operation for 10 years. Two container vessels with various capacities are considered. Both vessels are expected to have equal lives of 20 years. The capital cost of each new vessel can be depreciated using the straight-line depreciation method. The below table shows estimated projected revenue and costs for each Vessel Project and the residual value of each vessel at the end of year 20. The vessel will be sold at the end of year 10 and the expected market value of each vessel for sale is also given in the table. The company tax rate is 30%. The required rate of return used for evaluating the projects is the company’s WACC from parta.

The company has a long-term investment plan and needs a loan. Suppose that you hold a position of loan manager of a bank. XYZ Engineering approaches your bank to apply for a new loan of 1 million dollars. Will you approve the application? Justify your answer. (Word limit: 400words)
Question 3
a) A 60% debt-financed Australian iron ore company sells its iron ore into the Chinese market. Identify risks faced by the company and specific instruments that can be used to control these risks. (Word limit:200)

b) A large and well-known listed company wants to raise $1 million next month for its 12-month period project. Identify and explain four different financing options available to it. (Word limit:200)
Question 4
The below table contains the monthly returns of two shares BHP and Qantas for the 12 months from 1 September 2019 to 1 August2020.

a) Calculate the average monthly holding-period returns and the standard deviations of these returns for BHP andQantas.

b) Assume you have decided to invest 60% of your money in BHP and 40% in Qantas. Calculate the expected monthly holding-period return and the standard deviation of the return for the two-shareportfolio.

c) Discuss whether you have gained benefits through the creation of the portfolio of 60% in BHP and 40% inQantas.(word count: 500 words)

Note: You can use Excel spreadsheet to work on part a and b. However, the answers, working process explanation including formula used, and discussion should be in Word document. The spreadsheets are submitted as an appendix.
Question 5
a) ‘When the inflation rate in Australia is relatively higher than the inflation rate in the USA, the value of the Australian dollar will increase relative to the US dollar.’ Comment on the above statement using the theory that explains the adjustment of foreign exchange rates. (Word limit:150)
Continued …
b) ABC Engineering Australia is expected to pay €200,000 to a company in Germany for importing machinery three months from now. The spot exchange rate is A$/€0.63. However, it is forecast that Australian dollars will depreciate, and the exchange rate may move to A$/€0.58 in three months when the company will need the Euro. The company is considering using either a forward hedge or an option hedge to mitigate the foreign exchange risk. Relevant information is providedbelow.
• The 90 day forward rate as of today isA$/€0.60.
• Acalloptionon€thatexpiresin90dayshasanexercisepriceof
A$/€0.61 with a premium of A$0.01.
• A put option on € that expires in 90 days has an exercise price of A$/€0.59 with a premium ofA$0.01.
Which is the best strategy for the company to mitigate the foreign exchange rate risk? Why?(Word limit :500 words)

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