Question 5 1) Jim, a financial analyst, is valuing ABC Limited ("ABC") using an equity...
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Question 5 1) Jim, a financial analyst, is valuing ABC Limited ("ABC") using an equity and an asset-based approach. ABC's only debt is a bank loan and it has a debt-to-equity ratio of 1 while its tax rate is 30%. The beta of ABC is 1.2, the risk-free rate is 2%, and the market risk premium is 8%. The bank loan's interest rate is 6%. (a) Calculate ABC's cost of equity. (b) Calculate ABC's weighted average cost of capital (WACC). 2) Jim also wants to evaluate the credit quality of ABC Limited (ABC) with the following information: ABC Limited Sales Cost of good sold Depreciation Operating income (earnings before interest and tax) Interest expense Income tax expense Net income Preferred shares dividends Common shares dividends Debt principal repayment Tax rate Year Ended 2019 $ 20,000,000 12,000,000 2,000,000 3,000,000 1,200,000 400,000 1,400,000 500,000 800,000 1,000,000 30% Calculate ABC's funds flow coverage ratio for BB Bank
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