So I only have 2 hours to solve this.
Question 1( Mini-Case) You are newly appointed CFO in a listed Mid-Sized company in the food industry. Your company financial performance is stable, with ROE is around 8-10%, which is above industry average; EBIT (Operating Income) interest coverage is sufficient, while company has some seasonality in terms of sales, thus has impact on cash flows. Long term capital financing the company bond credit rating is A-, which means easy to raise debt, cost is lower than short term borrowings.
Identify the capital structure issues that CFO must address and explain the effects and significance of these issues. (3-4 Bulletin points and explain with your understanding, within 350words, 50 Marks)
Question 2: Your company is asking you as a CFO to consider your capital costs for your long term investment projects. As you collect the recent capital information as the follows:
Your company issue the common shares of Cnd$100/share, 2 million shares outstanding; Your company Beta is 1.7 and market risk free rate is 2% at this moment, and expected market return is 7%;
Your company issue the bond at the current quote of 970; Your coupon payment rate is 7%, while payment term is semi annual; the bond tenor is 14 years; Your bond face value is 250million;
Your company also issue some preferred stocks at cnd$70/share, with dividend payment of cnd7/share, total amount of issue is 100million;
Your corporate tax rate is 27%;
Please calculate your company’s WACC (25Marks, show the work progress by each step)
Question 3 ( Mini Case); Consider a day on which the S&P/TSX 60 Index, an index of 60 large stocks, rose 59 points. On that same day, assume you are a professional investor has a large portion of investment of Air Canada, which is one of the stocks in the Index, announced some unexpectedly bad news. The price of Air Canada declined $10 on that same day. Using this example, discuss systematic risk, portfolio diversification, and asset specific risk. (25 Marks, list three bulletin points and discussed each within 250words)
