TABLE OF CONTENT

ACKNOWLEDGEMENTS 2

1. COLEMAN SYSTEM BACKGROUND INFORMATION 4

2. COST OF CAPITAL FOR COLEMAN SYSTEMS 5

2.1 Calculate cost of debt (rd) 5

2.2 Calculate ratio debt/capital and equity/capital in market value terms 6

2.3 Calculate Beta (β) for Coleman Systems 8

2.4 Calculate Cost of Equity 10

2.5 Calculate the weighted average cost of capital for Coleman Systems 10

3. THE WACC AND PROJECT VALUES FOR DIFFERENT DEBT – EQUITY RATIOS AND THE OPTIMAL CAPITAL STRUCTURE FOR THE PROJECT 11

3.1 Case 1: No bankruptcy risk without tax 11

3.2 Case 2: No bankruptcy risk with tax 13

3.3 Case 3: With bankruptcy risk with tax 15

4. DISCUSSION ON AGENCY AND SIGNALLING EFFECT 18

5. REPLACEMENT PFOJECT 21

5.1 Replacing Machine A with Machine B 21

5.2 Replacing Machine A with Machine C 26

6. UNDERTAKE A SENSITIVITY ANALYSIS FOR THE TWO PROJECTS. 31

REFERENCES 34

SEMESTER 2013

CORPORATE FINANCE–BMCF5103

ASSIGNMENT (60%)

1. COLEMAN SYSTEM BACKGROUND INFORMATION

Coleman Systems is a private manufacturing company that makes electrical components. We have the following information about Coleman, as well as three listed companies in the electronics industry.

|Term |Coleman |Skye |Allied |Foust |
|Book value of assets (£m) |£83.9 |£91.3 |£66.9 |£112.0 |
|Book value of debt (£m) |£24.2 |£99.9 |£70.0 |£85.2 |
|Number of shares (m) |4.52 |3.82 |3.51 |7.24 |
|Share price