3.

Chapter 6: 2017 Dec Q1 Conejo (b) – Cost of debt;

Conejo（b） Cost of debt

Spot yield rates based on BBB rating
1 year 0.022 0.022
2 year 0.0251 0.0251
3 year 0.0284 0.0284
4 year 0.0325 0.0325
5 year 0.0362 0.0362

Bond value based on BBB rating

Coupon payable on these bonds will increase by 37 basis points, thus 5.2%+0.37%=5.57% $5.57 x 1.0220^(-1) + $5.57 × 1.025
$5.57 x 1.0220^(-1) + $5.57 × 1.0251^(-2) + $105.57 × 1.0284^(-3) = $107.81
Current bond value = $107.80
Although the credit rating of Conejo Co declines from A to BBB, resulting in higher spot yield rates, the value of the bond does
This is because the increase in the coupons and the resultant increase in value almost exactly matches the fall in value from the

Coupon rate required from the new bond

( $R x 1.0220^(-1)) + ( $R × 1.0251^(-2)) + ( $R × 1.0284^(-3)) + ( $R × 1.0325^(-4)) + ( $R x1.0362^=5))+($100x1.0362^-5))=$100
4.5665R + 83.71 = 100 R = $3.57 Thus coupon rate for the new bond is 3.57%.

4.Chapter 6: 2013 Jun Q1 Mlima (a) – Risk adjusted WACC & APV
Ziwa Co's ungeared cost of equity represents the return Ziwa Co's shareholders would require if Ziwa Co was financed entirely
The return would compensate them for the business risk undertaken by the company.
This required rate of return would compensate Mlima Co's shareholders as well because, since both companies are in the same
This rate is then used as Mima Co's cost of capital because of the assumption that Mlima Co will not issue any debt and faces n
Therefore its cost of equity (ungeared) is its cost of capital.

Working
Ziwa CO
MV debt = $1,700m × 1.05 = $1,785m 5% irredeemable bonds
MV equity = 200m × $7 = $1,400m 200 million shares
Liwa Co, ungeared Ke
ke=kei+(1-T)(kei-kd)*(Vd/Ve)
MM Proposition 2(with tax)
16.83% = keit (1 - 25%) × ( kei - 4.76%) × (1,785/1,400)
16.83% + 4.55% = 1.9563 × kei
kei = 10.93%
5.57 x 1.0220^(-1) + $5.57 × 1.0251^(-2) + $105.57 × 1.0284^(-3) = $107.81

ld rates, the value of the bond does not change very much at all.
matches the fall in value from the higher spot yield rates

)+($100x1.0362^-5))=$100

e if Ziwa Co was financed entirely by equity and had no debt.

ce both companies are in the same industry, they face the same business risk.
will not issue any debt and faces no financial risk.
 Appendix 1: Estimated value of the Mehgam project excluding the Bulud Co offer

(All amounts in YR, millions)

Year 0 1 2 3 4
Sales revenue (w2) 18,191 66775 111493 60360
Parts costs (w2) -5,188 -19060 -31832 -17225
Variable costs (w2) -2.921 -10720 -17901 -9693
Fixed costs -5,612 -6437 -7068 -7760
Royalty fee (w3) -4,324 -4813 -5130 -5468
Tax allowable depreciation -4500 -4500 -4500 -4500
Taxable profits/(loss) -4,354 21245 45062 15714
Tax loss carried forward -4354
40708
Taxation (40%) 0 0 -16283 -6286
Add back loss carried fwd 4354
Add back depreciation 4500 4500 4500 4500
Cash flows after tax 146 25745 33279 13928
Working capital -9600 -2112 -1722 -1316 14750
Land, buildings and
machinery -39000
Cash flows (YR, millions) -48600 -1966 24023 31963 28678