1)Home depot expects to have sales this of $20million under its current credit policy. The present terms are net30; the DSO is 45 days, and the bad debt loss percentage is 3%. Also, Home Depot's cost of capital is 10%, and its variable costs total 70% of sales, Since Home Depot wants to improve its profitability, a proposal has been made to offer a 2% discount for payment within 15 days; that is, change the credit terms to 2/15, net 30. It predicts that sales would increase by 10% and that 75% of all customers would take the discount. The new DSO would be 35 days, and the bad debt loss percentage on all sales would fall to 1%. What are the incremental pre-tax profits from this proposal?
Q2: Samsung hired you as a consultant to help estimate its cost of capital (WACC). You have been provided with the following data:
1. Samsung currently has one type of bond outstanding. The bond is marking semi-annual coupon payment. It has 20 years left until maturity and is carrying a7.25% coupon rate. It currently has a yield-to maturity of 8.57%. The bond has a book value of $40 million as indicated on the balance sheet.
2. A typical saving account at a bank is offering an interest rate of 1.5%, GIC is currently offering a return of 2.5% and a 25-year Government of Canada bond is currently yielding at 5.5%.
3. The beta of Samsung's stock is 1.25 and the expected return of the market index such as TSX composite index is 11.5%.
4. There is currently 10 million shares of Samsung stock trading publicly on the TSX stock exchange. Samsung is expected to pay a dividend of $1.2 per share nest year. The actual market price of Samsung IS considered undervalue because the actual return is 16% which is different than the expected return of the stock.
5. The tax rate associated with Samsung is 40%
What is the WACC of Samsung ?