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Company - Bluescope Steel Limited

Part A - Cost of capital and capital structure Determine the cost of capital for each source of finance as well as the weighted average cost of capital for 2018. What does the WACC suggest for the company? Provide an evaluation of the company's capital structure policy and recommend an appropriate capital structure policy for the company. Do you find the capital structure risky for the company? Justify your answer.

Answer - The source of finance for company is Long term debt and Shareholder's Equity. The capital structure is as under:

 Source Amount (\$ in Millions) Long Term Debt 784.90 Equity 6393.80 Total 7178.70

Calculation of WACC:

Cost of Debt:

kd = I (1 - t)

Where, I = Interest Rate

t = Tax rate

Interest for the period = \$ 86.10 Million

Interest Rate = 86.10 / 784.90 = 10.96%

Tax Rate = 30%

kd = I (1 - t) = 10.96% x (1 -0.30) = 7.68%

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Cost of Equity:

In the given case, Gordon Dividend Growth model will be used for calculation of Cost of Common Stock. According to the model, Cost of Common Stock (ke) is calculated as under:

ke = D1 / P0 + g

Where, D1 = Expected Dividend per share

P0 = Current Market Price

g = Growth rate

D1 = 14 cents per share

g = 17.40% (As per statistics)

P0 = \$ 12.83

ke = D1 / P0 + g = 0.14 / 12.83 + 17.40% = 18.49%

Using P/E Ratio, ke = 1 / (P/E) = 1 / 4.07 = 24.57%.

On reasonable grounds, Cost of Equity calculated on the basis of Gordon model will be considered.

 Source Amount (\$ in M) Proportion Cost Product Long Term Debt 784.9 0.109 7.68% 0.84% Equity 6393.8 0.891 18.49% 16.47% WACC 7178.7 17.31%

The WACC of the company suggests the minimum rate of return earned by the company for its investors.

Currently, more than 89% of the capital consists of owned funds, this structure provides the company a credible opportunity to improve and grow its revenues and profits. The capital structure is not risky as the company is earning sufficient profits to pay off the liabilities.

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Part B - Dividend policy Analyse the company's dividend practices and the use of internal funds over the 2009-2018 period. Describe the dividend pattern and policy followed.

Answer - The dividends paid by the company is as under:

 Year Interim Final 2009 5 cents Nil 2010 Nil 5 cents 2011 2 cents Nil 2012 Nil Nil 2013 Nil Nil 2014 Nil Nil 2015 3 cents 3 cents 2016 3 cents 3 cents 2017 4 cents 5 cents 2018 6 cents 8 Cents 2019 6 cents To be declared

The company is having a practice of paying Dividends. But in lieu of poor world economic conditions and in order to improve financial results of the company, the final dividend was not paid by the company in the year 2009. Since 2015, after improvement in the performance and outlook of the company, the company has started paying dividends, which has increased from 6 cents per share in year 2015 to 14 cents per share in 2018. In the year 2019, it is expected that the company will be paying 14 cents per share as dividend. The dividend reinvestment plan is not active

The company has wisely used its internal funds, which helped in marking a growth rate of more than 17% over the years.

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