WICO Databank Limited has a debt-equity ratio of 0.45. The required return on the company's unlevered (ungeared) equity is 17 per cent, and the pre-tax cost of the firm's debt is 9 per cent. Sales revenue for the company is expected to remain stable indefinitely at last year's level of GHC23,500,000. Variable costs amount to 60 per cent of sales. The tax rate is 25 per cent, and the company distributes all its earnings as dividends at the end of each year. Required: a) Use the flow to equity method to calculate the value of the company's equity. b) What is the required return on the firm's levered (geared) equity)? c) Use the weighted average cost of capital method to value the company. What is the value of the company's equity? What is the value of the company's debt?
WICO Databank Limited has a debt-equity ratio of 0.45. The required return on the company's unlevered (ungeared) equity is 17 per cent, and the pre-tax cost of the firm's debt is 9 per cent. Sales revenue for the company is expected to remain stable indefinitely at last year's level of GHC23,500,000. Variable costs amount to 60 per cent of sales. The tax rate is 25 per cent, and the company distributes all its earnings as dividends at the end of each year.
Required:
a) Use the flow to equity method to calculate the value of the company's equity.
b) What is the required return on the firm's levered (geared) equity)?
c) Use the weighted average cost of capital method to value the company. What is the value of the company's equity? What is the value of the company's debt?
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