2. A company has share capital of Kshs 20 million and is planning to invest an additional fund ofKshs 16,000,000 towards its expansion programme. Suggest the best option from thefollowing, from a tax point of view:1. To issue share capital of Kshs 16,000,000.2.To borrow Kshs 4,000,000 @ 18% pa and to issue debentures of Kshs 4,000,000 @ 11%pa and the balance amount be collected by issuing shares in the public.3.To issue debentures for Kshs 10,000,000 @ 11% pa and the balance be collected byissuing shares in the public.4. Rate of return is 30% before paying any interest and tax.Rate of tax is 30%

Budgeting options gives us a clear idea about the cost of capital raised in various way like share,…

Answered: A company has share capital of Kshs 20…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Cocoa Company is evaluating an investment shown below. The investment will acquire an initial investment of RM 50,000. The cost of capital is 11 percent and the cash inflows are as follows:- Year Main Complex1 RM 15,0002 RM 10,0003 RM 12,5004 RM 15,0005 RM 30,000Based on the above information, calculate for Cocoa Company:i. Payback period ii. Net Present Value (NPV) iii. Profitability index b. After calculating the first investment, Cocoa Company found another investment.Project B costs RM1,120,000 and having payback period of 3.50 years, discountedpayback period of 4.44 years, Net Present Value (NPV) of RM 460,000 and ProfitabilityIndex of 1.41. Which project would you recommend considering all?
1)Warwickshire plc is appraising a new project in a different line of business to its core operations. It has identified a suitable company, Nottingham plc, to use as a proxy. Details are as follows:Equity beta of Nottingham 1.250Market value of Nottingham's debt: £39mMarket value of Nottingham's equity: £45mCorporation Tax rate (both companies): 30%If Warwickshire is finance by £95m of equity and £95m of debt what would a suitable proxy equity beta for Warwickshire plc to use in the appraisal process? 2) Ms Obang is reviewing the performance of one of the shares in her portfolio. She bought the share a year ago for £4.00 (ex-div). Over the year it paid a dividend of 20p and the share price currently stands at £4.20 (ex-div). The shares equity beta is 1.4. The yield on short-date Treasury Bills over the year has been 1.2% and the Market Return is 6%. Using the CAPM, what has been the performance of the share over the last year? 3) The following information relates to the acquisition of…
e. Kecewa Berhad is planning a RM50,000 expansion. The expansion is to be financed by RM20,000 debt and RM30,000 common stock. The before-tax cost of debt is 9% and the cost of common stock is 14%. If the corporate tax is 40%. Determine the Weighted Average Cost of Capital (WACC) for Kecewa Berhad.
Multiple choice: Assuming that a company’s project is to be funded as follows: 40% from bank loan, 30% from issuance of ordinary shares, and 30% from issuance of preference shares. Per company’s computations, the after tax cost of capital are as follows: 10%, 20% and 12% for bank loan, ordinary shares, and preference shares, respectively. If the tax rate is 30%, which cost of capital (rounded off) should the company use? • 10%• 5%• 30%• 14%
You are looking to purchase Company A. Your projections for the EBITDA of Company A are as follows: EBITDA $21.51 Year 1 $2.0 O $19.77 $21.78 Your cost of capital is 20%. Your investment banker shows you the EBITDA multiples for the following comparable companies: Company x 5.0x Company y 5.50x Company z 6.0x Year 2 $3.0 Given the above information what is the price that you would like to offer to Company A shareholders? Not enough information Year 3 $3.5 None of the above Year 4 $4.0 Year 5 $5.0
1a) Turnbull Co. is considering a project that requires an initial investment of $270,000. The firm will raise the $270,000 in capital by issuing $100,000 of debt at a before-tax cost of 8.7%, $30,000 of preferred stock at a cost of 9.9%, and $140,000 of equity at a cost of 13.2%. The firm faces a tax rate of 25%. What will be the WACC for this project? 1B) Kuhn Co. is considering a new project that will require an initial investment of $45 million. It has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1555.38. The yield on the company’s current bonds is a good approximation of the yield on any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of $8 at a price of $92.25 per share. Kuhn does not have any retained earnings available to finance this…
In a case that A firm's cost of capital is 12 percent. The firm has three investments to choose among; the cash flows of each are as follows: Cash Inflows Year A B C 1 $395 - $1,241 2 395 - - 3 395 - - 4 - $1,749 - Each investment requires a $1,000 cash outlay, and investments B and C are mutually exclusive. a. Which investment(s) should the firm make according to the net present values? Why? b. Which investment(s) should the firm make according to the internal rates of return? Why? c. If all funds…
SABC Limited has the following information: The market values of the different components are: Debt (long-term loans): R200m. and Ordinary Shares: R500m. The current (market related) cost of the different components was already calculated as being. Debt (long-term loan) 6% (after-tax) and Ordinary Shares: 14%. Required: Calculate the WACC of SABC Limited by: a. Using the mathematical formula b. Completing the WACC table
The financial manager of a company has formulated various financial plans to finance Rs. 30,00,000 required to implement various capital budgeting projects. You are required to determine the indifference point for each plan, assuming 55 % corporate tax rate and the face value of equity shares Rs. 100 AND also show verification table. a) Either equity capital of Rs. 30,00,000 OR 12 % Preference share capital of Rs. 10,00,000, 10 % Debentures and Rs. 10,00,000 equities. b) Either equity share capital of Rs. 20,00,000(Fully paid) and 10 % Debentures of Rs. 10,00,000 OR 12 % preference share capital of Rs. 10,00,000, 10 % Debentures of Rs. 8,00,000 and Rs. 12,00,000 by issuing equity shares (Fully paid).
Suppose there are two alternatives to finance a power generation project planned by ABC (Pvt.) Ltd. Alternative A is to financing the total capital of Rs. 450 Mn with equity and Alternative B is to employ Rs.150 Mn equity, Rs. 100 Mn by 14% debentures and the rest by a 15% bank loan. The corporate tax rate is 30% and the owners expects 18% dividend in both alternatives. Earnings before interest and tax (EBIT) for the project is estimated as Rs.250 Mn. Evaluate two alternatives and advise ABC (Pvt.) Ltd. to select the best alternative.
XYZ Ltd. Decides to use two financial plans and they need Rs. 50000 for investment. Plan A Plan B Particular 10% Debt 40000 10000 Equity Share@ 10 each Total insestment needed 10000 40000 50000 50000 4000 1000 Number of Equity Share Theearnings before income and tax are assumed at Rs. Rs. 5,000 and Rs. 12,500. Tax rate is 50%. Calculate the EPS.
Suppose there are two alternatives to finance a power generation project planned by ABC (Pvt.) Ltd. Alternative A is to financing the total capital of Rs. 450 Mn with equity and Alternative B is to employ Rs.150 Mn equity, Rs. 100 Mn by 14% debentures and the rest by a 15% bank loan. The corporate tax rate is 30% and the owners expects 18% dividend in both alternatives. Earnings before interest and tax (EBIT) for the project is estimated as Rs.250 Mn. a. Calculate weighted average cost of capital (WACC) for both alternatives.

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