Typhoon Group Ltd is a large Australian-based multinational conglomerate firm that currently operates divisions within the following industries: chemicals, engineering, energy, and logistics. The board of Typhoon, noting the recent trade dispute between the United States and China, are considering expanding the business into new industries in China in an effort to capitalise on the potential of these new markets during the dispute. Some projects under consideration include vitamins (and related products such as skin creams), milk products, baby formula, and other consumer staples. However, the CFO of Typhoon is concerned that the firms existing WACC is not suitable as a discount rate for the projects being evaluated and has asked your team to calculate a more suitable alternative number that can be used as a discount rate in potential project evaluation. (Note that Typhoon uses a capital structure of 60% 10-year corporate bonds and 40% ordinary shares.)
Question:
1. Determine the WACC for the company Treasury Wine Estate to use in the capital budgeting projects they are considering.
(under the imputation tax system assuming Typoon pays fully franked dividends)
*Make assumption when determine WACC
2. Under what circumstances can Typhoon use the value you have calculated for capital budgeting? When shouldn’t they use this value in capital budgeting? Discuss.
Given:
Re = 3.5393%
Rd =3.72%
