Unit 10 · Case
The Same Business, Two Countries
Cost of Capital · US → South Africa → Ghana
This is the student brief. The instructor guide is distributed separately.
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Highveld Industrial Limited manufactures pumps, valves, and pressure vessels for the mining and water-treatment sectors. It is listed on the Johannesburg Stock Exchange, has traded for thirty years, and is followed by four equity analysts.
Highveld has decided to establish a Ghanaian manufacturing subsidiary, serving West African mining and municipal water customers from a plant near Tema. The business would be the same: same products, same customers by type, same operating model.
The Ghanaian management team has submitted an investment proposal. It is discounted at 18 percent. Their note says: "We have used 18%, being a prudent premium over the 16% the group applies in South Africa."
The group finance director has asked Mountain River whether 18 percent is the right rate.
Exhibit 1 · Highveld Industrial — South African market data
| Input | Value |
|---|---|
| Market value of equity | R 4,200m |
| Market value of debt | R 1,100m |
| Equity beta (5-year monthly) | 1.10 |
| Pre-tax cost of debt | 11.0% |
| South African corporate tax rate | 27.0% |
| 10-year South African government bond | 10.5% |
| South African market risk premium | 6.0% |
Exhibit 2 · Inputs available for Ghana
| Input | Value |
|---|---|
| 10-year US Treasury yield | 4.0% |
| US market risk premium | 6.0% |
| Global industry beta, industrial equipment manufacturers | 1.10 |
| Ghana sovereign spread over US Treasuries (dollar Eurobonds) | 600 bp |
| Ghana inflation (expected) | 20% |
| US inflation (expected) | 2% |
| Ghana 91-day Treasury bill yield | 25% |
| Target financing | 70% equity / 30% debt |
| Ghana pre-tax cost of debt | 28% |
| Ghana corporate tax rate | 25% |
The Ghana Stock Exchange lists thirty-odd companies, many of them trading infrequently.
Question 1 · 15 minutes
Compute Highveld's weighted average cost of capital in South Africa.
Everything you need is in Exhibit 1.
Question 2 · 13 minutes
Now build a cost of equity for the Ghanaian subsidiary, then use the target financing inputs to compute its WACC.
Work in dollars first, then convert to cedis.
Before you start: explain briefly why you cannot simply apply CAPM using the Ghanaian Treasury bill yield and a beta from the Ghana Stock Exchange.
Question 3 · 9 minutes
Ghanaian management has used 18 percent. Compare that with your Ghanaian WACC.
How much of the gap is genuine risk, and how much is estimation noise? What would you tell the group finance director — and what would you tell the Ghanaian team?