20 selected written case, essay and calculation tasks. Use the model answers and marking guides to assess your responses.
Written response · Self-assessment · 12 marks
Harbour Gateway Terminals Limited, a Hong Kong-listed port operator, plans a terminal expansion financed at target weights of 60% new senior debt and 40% equity. New senior debt of the required credit rating is currently priced at 8.0% pre-tax. The treasurer points out that the group's average borrowing rate last year was 5.5% because two legacy loans carry government interest subsidies. The Hong Kong profits tax rate is 16.5%. The cost of equity is estimated by CAPM: risk-free rate 4.0%, equity beta 1.2, equity risk premium 5.0%.
Required (marks total 12):
(a) Derive the after-tax cost of debt for the expansion and the cost of equity.
(b) Compute the WACC at the target weights.
(c) Evaluate whether the 5.5% subsidy-adjusted average rate is an appropriate marginal cost of debt for this incremental financing, quantify the error it would introduce into the WACC, and explain the direction of the resulting NPV bias and its decision consequence (no project cash flows are given).
Round final percentages to two decimal places.
