Finance and Short Term Debt

Encana toll of Capital Before calculating the approach of capital Ill calculate embody of equity and cost of dept and capital structure for ENCANA 1 Cost of Debt ENCANA cost of debt included cost on short marge debt , immense term debt and publicity traded delight step 1. 1 Short term Debt Short term obligations (Ex. 1) = $ 1425 million Interest Rate (Ex. 1) = 3. 52% make out amount for short term debt participation = 1425 ? 3. 52% = 50. 16 million 1. 2 Long term Debt Other hanker term liabilities (Ex. 1) = $1278 Interest mark (Prime rate charged) = 5. 25%Total amount for long term debt interest = 1278 ? 5. 25% = 67. 095 million 1. 3 Publicity traded Publicity traded interest = total interest (short term debt interest amount + long term debt interest amount) Publicity traded interest = 524 ( 50. 16 + 67. 095) = 406. 75 million Interest rate on publicity traded = Publicity traded interest ? L. T debt on publicity traded Interest rate on publicity traded = 406. 75 ? 5351 = 7. 6% Cost on debt = Weight of long term debt ? Rate of interest on L. T debt + Weight of short term debt ? Rate of interest on S.T debt + Weight of publicity traded ? rate of interest on publicity traded = 1278/8054* ? 5. 25 + 1425/8054 ? 3. 52 + 5351/8054 ? 7. 60 = 0. 833 + 0. 622 + 5. 049 = 6. 5% *The amount $8054 is total amount of debt given in Exhibit 3 1. 4 find out revalue rate Tax rate for ENCANA can be determined as follow Tax Rate= T= Net earnings to begin with interest and tax ? tax expense T= 1260 ? 4089 = 30. 81% 1. 5 Cost of debt after tax Cost of debt after tax = cost of debt before tax (1- Tax Rate) Cost of debt after tax = 6. 5% ( 1- 30. 81%) = 4. % == rate of debt (rd) 2 Cost of equity There are following two ways to calculate ENCANAs cost of equity 1. using SML equation 2. Calculating cost of equity by dividend growth precedent 2. 1 Calculation of cost of equity for ENCANA by using SML equation rs = r* + MRP (b) r* = 4. 20 % (Govt. long Term treasury Bil ls) rm = 13. 9% (S&P arithmetic average return) MRP = rm r = 13. 9-4. 20 = 9. 7 Beta = 1. 27 rs = 4. 20 + 9. 7 *1. 27 rs = 16. 519 % 2. 1 Calculation of cost of equity for ENCANA by using dividend growth model rs = (D1/ Po F) + gWhere D1= next year dividend Po = current price of share in market F = Floatation Cost Growth from past data Year Dividend per share Growth * 2002 0. 2 2003 0. 15 -25% 2004 0. 2 33. 3% 2005 0. 28 40% *Growth rate is calculated as 0. 15/0. 2= 0. 75-1 = -0. 25? 100 =-25% 0. 2/0. 15= 1. 33-1= 0. 33 ? 100 = 33. 3% 0. 28/0. 2= 1. 4-1 =0. 4 ? 100 = 40% Average Growth= -25 + 33. 3 + 40 = 16. 1% rs = (Do (1+ g) / Po F) + g rs = 0. 28 (1+0. 1611) / 56. 75 (1- 0. 05) + 0. 1611 rs = 0. 25108/53. 9125 +0. 1611 rs = 16. 713% Average rs = (16. 713+16. 519)/2 = 16. 616% WACC The WACC equationis the cost of each capital componentmultiplied by its proportional weight and then summing WACC = rD(1-Tc)*(D/V)+rE*(E/V) Where, Re = cost of equity Rd = cost of deb t E = market value of the firms equity D =market value of the firms debt V = Total Capital = E + D E/V = we = percentage of financing by equity D/V = wd= percentage of financing by debt T =corporate tax rate By putting ValuesTotal Equity= E = no of shares * price of shares = 854. 9 * 56. 75 = $48515. 575 million Total Capital = Equity + Debt = 48515. 575+ 8054 = $56596. 575 Million WACC = wd * rd + we * re = 8054/56596. 575 * 4. 5 + 48515. 575/56596. 575 * 16. 616 = 0. 6404 + 14. 2436 = 14. 884% ENCANA should accept this project which exit give a return of more than 14. 884%, because ENCANA has to pay their investors a return of 14. 884 and this will also make profit which can be utilized as retained earnings and increase growth of its dividend.