Virginia May Chocolate Case

Question 1

a) The starting point for this case is to determine the total market values for Virginia May. Therefore, the relevant information about notes payable, long term debt and total common equity are taken into consideration, which are provided in Table 1 of the case. Table 2 indicates a total market values of 392.650.378,84€, which is 81.637.621,16€ les compared to the belonging book values. While the book value of notes payables is the same for the market value, the long term debt as well as the total common equity differ in this respect. Using the formula provided in the case the present value (PV) for the bond is equal to 889,09€. By multiplying the PV of the bond with the number of bonds, equal to 220.000, the market values of the long term debt is calculated. Multiplying the shares outstanding with the share price of 17,45€ the market values of equity can be calculated. Summing up all the calculated market values, the bottom line is the current market values provided in Table 2.

b) Once all the steps described above are done, one can use this information to calculate the weighted average cost of capital (WACC). Table 3 of the appendix shows the different weights for each category. Taking into account the relevant information about the cost of each category, it is easy to multiply them with the weights. Summing up all three pre-tax values, one ends up with a pre-tax WACC of 12,54 percent. Given the information that the marginal tax rate for Virginia May is 40 percent, notes payable and the long term debt must be taxed. Therefore, one ends up with an after-tax WACC equal to 10,0975 percent, which is almost 20 percent less compared to the pre-tax WACC.

Question 2

The next step in the evaluation process of the future financing alternatives Virginia May Inc. faces, Table 3 presented in the case should be completed. In order to determine the conversion values the following formula from the case:Conversion Values=P0(1+g)tR.Table 4 in the Appendix...