California Pizza
Autor: उत्कर्ष तिवारी • September 20, 2016 • Case Study • 285 Words (2 Pages) • 880 Views
Solution :
Considering WACC for evaluating the restructuring options.
Tax = 32.50%, constant for any capital structure.
D/E ratio : Based on the company decision to go for long term options.
Interest rate for debt is given = LIBOR+0.8% = 6.16%.
UnLevered Beta : 0.85 is given.
Beta Levered for diff capital structure : Beta unlevered*(1+(1-Tax)*(D/E))
For Expected return calculation we have considered the equity market risk premium to be at 10% from exhibit 6.
Risk free is taken from exhibit : return from 3yr US bonds
So Expected return Cost to equity (re ) = Risk Free + B*(EMRP)
EMRP = Risk market – Risk free
WACC = rd(D/V)(1-T) + re(E/ V)
CPK Capital Restructing Options | ||||
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D/C | 0 | 10% | 20% | 30% |
Interest Rate | 6.16% | 6.16% | 6.16% | 6.16% |
Tax rate | 32.50% | 32.50% | 32.50% | 32.50% |
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EBIT | 30054 | 30054 | 30054 | 30054 |
Interest Rate | 0 | 1391 | 2783 | 4174 |
EBT | 30054 | 28663 | 27271 | 25880 |
Tax | 9768 | 9315 | 8863 | 8411 |
Net Income | 20286 | 19347 | 18408 | 17469 |
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ROE Book Value | ||||
Debt | 0 | 22589 | 45178 | 67766 |
Equity | 225888 | 203299 | 180710 | 158122 |
Total Capital | 225888 | 225888 | 225888 | 225888 |
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ROE (Book Value) | 8.98% | 9.52% | 10.19% | 11.05% |
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ROE Market Value | ||||
Debt | 0 | 22589 | 45178 | 67766 |
Equity | 643773 | 628516 | 613259 | 598003 |
Total Capital | 643773 | 651105 | 658437 | 665769 |
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ROE (Market Value) | 3.15% | 3.08% | 3.00% | 2.92% |
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Going by Equity | ||||
No of Shares | 29100 | 28079 | 27058 | 26037 |
No of Shares repurchased | 0 | 1021 | 2042 | 3063 |
Share Price | 22.12 | 22.38 | 22.66 | 22.97 |
EPS | 0.70 | 0.69 | 0.68 | 0.67 |
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WACC calculation | ||||
Beta | 0.85 | 0.87 | 0.89 | 0.92 |
Interest (Debt, LIBOR+0.8%) | 6.16% | 6.16% | 6.16% | 6.16% |
Kd (Cost to debt) | 4.16% | 4.16% | 4.16% | 4.16% |
Rf (Risk Free, treasury bond return) | 5% | 5% | 5% | 5% |
Rm (Risk Premium) | 10.00% | 10.00% | 10.00% | 10.00% |
Ke (Cost to Equity) | 9.25% | 9.35% | 9.46% | 9.58% |
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D/E (ratio) | 0.000 | 0.036 | 0.074 | 0.113 |
D/C (ratio) | 0.000 | 0.035 | 0.069 | 0.102 |
E/C (ratio) | 1.000 | 0.965 | 0.931 | 0.898 |
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WACC | 9.25% | 9.17% | 9.10% | 9.02% |
Note 1. : From Exhibit 6 : CPK shares trades 10% more than the S&P small cap. |
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