Question

Please answer all questions

Belinda Page is a Senior Analyst with Pinnacle Investments. Their company regularly runs educational seminars to existing and potential clients to increase their investment knowledge. The aim is to assist investors make better informed decisions, or at least enable them to ask relevant questions when receiving investment advice. For next week’s seminar, Belinda has been rostered to talk about a business’ cost of capital. As a way of illustrating the various concepts around the topic, Belinda has decided to feature two publicly listed companies, Myers Holdings Ltd and Nick Scali Ltd. Both companies are in the retail trade, but their businesses are substantially different. For one, Myer is classified as being in the Department Stores Industry while Nick Scali is in Furniture Retailing (IBIS World 2018).   (see appendix-1 for data base access instructions to find company data)

Imagine your group as interning students with Pinnacle. Belinda has asked your group to help with the following tasks to help her deliver an interesting and informative presentation:

• Debt capital should only include interest bearing non-current liabilities.
• Borrowing cost is the same for both companies at 3.3% per year.
• The income tax rate is 30%
• Equity Market premium information could be seen from the website:

http://www.market-risk-premia.com/au.html

Use August 2018 figures from the chart therein to calculate for WACC.

• Beta values have been provided as 1.44 for Myer and 0.42 for Nick Scali.

Fill in the tables below in calculating WACC for 2018.                                                               2 marks

Note:	Long Term Debt in AUD ,000	Equity in AUD ,000	Total Capital in AUD ,000
Myer
Nick Scali

August 2018 Figures (Look up http://www.market-risk-premia.com/au.html )                             2 marks

Market return
Risk free rate

Cost of Equity (show workings below table)                                                                                2 marks

Myer
Nick Scali

Weighted Average Cost of Capital                                                                                                 4 marks

Show Workings to get WACC for each company:

Considering all the information above, explain the difference between Myer’s and Nick Scali’s WACC.                                                                                                                                                               3 marks

Answer 1