Clonliffe Cottage Cheese Manufacturing Limited Case Solution
- Assume the company finances 65% of its balance sheet with its bonds.
In order to calculate the value of the company’s debt portfolio which is currently 65% of the overall capital structure, the following calculations are made which are summarized as below:
In order to come up with this value, there are some further calculations required which include the calculations of the weighted average cost of capital which is calculated to be as follows:
| WACC | 5.23% |
| Cost of Debt | 5.01% |
| Cost of Equity | 7.04% |
| Weight of Debt | 65% |
| Weight of Equity | 35% |
| Riskfree Rate | 4.10% |
| Market Risk Premium | 4.9% |
| Beta | 0.6 |
| Tax Rate | 15% |
The cost of equity of the company is calculated using the CAPM approach. Over here the risk free rate for the company is taken to be 4.10% whereas the market risk premium as well as beta is taken to be 4.9% and 0.6 respectively. With the help of the above, the value of equity is taken to be 7.04%.
With the help of weighted average cost of capital of 5.23% for the company, the present value is taken for the bonds of the company which is be $1013, 805,713.71.
| Bond Valuation Example | 2017 | 2018 | 2023 | 2030 | 2038 |
| Face Value | $ 200,000,000 | $ 150,000,000 | $ 150,000,000 | $ 500,000,000 | $ 900,000,000 |
| Annual Coupon Rate | 2.05% | 4.50% | 5.00% | 6.00% | 7.50% |
| Annual Required Return | 0.65% | 0.65% | 0.65% | 0.65% | 0.65% |
| Years to Maturity | 1.0 | 1.0 | 1.0 | 1.0 | 1.0 |
| Payment Frequency | 2 | 2 | 2 | 2 | 2 |
| Value of Bond | $ 202,786,408.91 | $ 155,746,968.38 | $ 156,493,327.91 | $ 526,620,156.56 | $ 961,350,753.34 |
| Value of the Company debt Portfolio | $1,013,805,713.71 |
Calculate the duration of each bond and explain how these values may be interpreted. Calculate the duration of the bond portfolio.
| BOND B | |
| Coupon | 4.50% |
| Face value | 150000000 |
| Frequency | 2 |
| Maturity | 1 |
| Yield | 0.65% |
| Price | 155,746,968.378 |
| Macaulay Duration | 0.989 |
| Modified Duration | 0.986 |
| Dollar Duration | 1535658.460 |
| BOND D | |
| Coupon | 6.00% |
| Face value | 500000000 |
| Frequency | 2 |
| Maturity | 1 |
| Yield | 0.65% |
| Price | 526,620,156.557 |
| Macaulay Duration | 0.986 |
| Modified Duration | 0.983 |
| Dollar Duration | 5174626.988 |
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