Shoresalt Mini Case

Enes TAY
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                                 MINICASE CHAPTER 13

         According to Bernice the equity rate is 10.5%. However; Mr. Brinepool says that “Our target rate of return on equity has been 16% for many years. By using given information we can find that:

[pic 1]

[pic 2]

 So we can say that Bernice’s value is close to real equity rate.
         Another issue is the preferred selling price. He uses 100$ for per share. However; it is known that shares are sold at $70 per share. So the rate of return is 
 

        Main mistake that Mr. Brinepool made is calculating WACC. We know that WACC should reflect market values instead of book values. That’s why we have to apply the given information to Sea Shore Salt’s financing table. Bank loan and Bond issues amounts are not changed. However we know that preferred stocks are sold at 70$ per share and the common stocks are sold at $40 per share. So the new table should be like below.

                                   [pic 4]

         As you can see in tha table the after updating the price of the Preferred stocks and Common stocks the total amount has changed and with respect to that the percentages are changed. Cause of the changes in rate of returns is explained above.

So according to these new numbers we can calculate our real WACC.
[pic 3][pic 5]

As you can see in calculation the WACC is 9% so the hurdle rate should be also %9. However Mr. Brinepool claims that hurdle rate is 10.7. That why I do not agree with his calculation.

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