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The capital structure of Jmaa Ltd. Which is considered optimal, as at 30 September 2009 was as follows :
The company intends to raise additional funds...
(Solved)
The capital structure of Jmaa Ltd. Which is considered optimal, as at 30 September 2009 was as follows :
The company intends to raise additional funds for investing in a new project which is estimated to
cost sh. 240 million.
Additional information:
1. Any new ordinary shares issued will incur a 12% floatation cost per share.
2. The most recent ordinary dividend per share was sh. 5.
3. The past and expected future earnings growth rate is 10%. The earnings growth rate is expected
to be matched with growth rate in dividends.
4. The current dividend rate is 6.25%.
5. The company expects to raise a maximum of sh. 36 million from retained earnings to finance
the project.
6. Additional 8% preference shares can be issued at the current market price of sh. 80 per share.
7. A new 12% debenture can be issued at sh. 960 for each debenture through the stock exchange.
8. Corporation tax rate is 30%.
Required:
i) The current market price per ordinary share.
ii) The number of ordinary shares that should be issued to finance the project.
iii) The company’s weighted marginal cost of capital (WMCC)
Date posted:
April 11, 2022
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Answers (1)
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Pick Ltd has the following capital structure which is considered optimal. The investors of Pick ltd expect earnings and dividends to grow at a constant...
(Solved)
Pick Ltd has the following capital structure which is considered optimal.
The investors of Pick ltd expect earnings and dividends to grow at a constant rate of 9% in the future.
The company has just paid a dividend of sh.3.6 per share and its stock currently sells at a price of sh.60 per share. Treasury bonds yield 11% and the return on the market is 14%.Pick ltd beta is 1.51 New preferred stock can be sold at sh.100per share with a dividend of sh.11 per share and flotation costs of sh.5 per share.
The company’s tax rate is 30%and it pays out all its earnings as dividend.12% debentures with a maturity of 10 years can be sold at sh.92 per debenture
Required
The weighted average cost of capital (WACC) using market values
Date posted:
April 11, 2022
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Answers (1)
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The optimal capital structure of DP Ltd. is as shown below.
The company has sh. 300,000 in retained earnings and is considering investing in a project...
(Solved)
The optimal capital structure of DP Ltd. is as shown below.
The company has sh. 300,000 in retained earnings and is considering investing in a project which will cost sh. 1,200,000
Required:
i) The marginal cost of capital (MCC) assuming a 30% tax rate.
ii) Retained earnings break point.
Date posted:
April 11, 2022
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Answers (1)
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Explain the meaning of the term “enterprise value” in the context of the valuation of a business entity.
(Solved)
Explain the meaning of the term “enterprise value” in the context of the valuation of a business entity.
Date posted:
April 11, 2022
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Answers (1)
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Laura Ltd intends to raise Sh.25 million to finance a new project through a rights issue. The project has a 10 year economic life with...
(Solved)
Laura Ltd intends to raise Sh.25 million to finance a new project through a rights issue. The project has a 10 year economic life with ho salvage value and is expected to generate annual cash inflows of Sh.7, 372,280. The company has 4 million issued and fully paid shares. The cost of capital is 15% and before the announcement of the rights issue, the market price per share was Sh. 18.
Required:
The cum-rights market puce per share.
Date posted:
April 11, 2022
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Answers (1)
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Chairimani Ltd. is contemplating to issue 8% bonds redeemable at Sh.100 par value in three years' time. Alternatively, each bond may be converted on that...
(Solved)
Chairimani Ltd. is contemplating to issue 8% bonds redeemable at Sh.100 par value in three years' time. Alternatively, each bond may be converted on that date into 30 ordinary shares of the company. The current market price per share is Sh.3.30 and this is expected to grow at 5% per annum into perpetuity. The company's cost of debt is 6% per annum.
Required:
(i) Market value of the bond.
(ii) Floor value of the bond.
(iii) Conversion premium per share.
Date posted:
April 11, 2022
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Answers (1)
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Rock Ltd. is planning to issue 10 million Sh.0.25 shares with a current market price of Sh. 1.55 cum-dividend. An annual dividend of Sh.0.09 has...
(Solved)
Rock Ltd. is planning to issue 10 million Sh.0.25 shares with a current market price of Sh. 1.55 cum-dividend. An annual dividend of Sh.0.09 has been proposed. The company earns an accounting rate of return on equity (R.O.E) of 10% and a dividend payout of 40%. The company also has 13%. Sh. 100 redeemable debentures with a nominal value of Sh.7 million, trading at Sh. 105. The debentures are due to be redeemed at par in five years' time.
Assume a corporation tax rate of 30%.
Required:
The weighted average cost of capital (WACC) of the company.
Date posted:
April 11, 2022
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Answers (1)
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Moran Ltd. earnings and dividend per share have been growing at a rate of 18% per annum. This rate is expected to be constant for...
(Solved)
Moran Ltd. earnings and dividend per share have been growing at a rate of 18% per annum. This rate is expected to be constant for four years, after which it will fall to 12% for another four years.
Thereafter, the growth rate will be 6% in perpetuity. The last dividend per share to be paid was Sh.2 and the investors' required rate of return is 15%.
Required:
The intrinsic value per share.
Date posted:
April 11, 2022
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Answers (1)
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Highlight three reasons why accounting profit might not be the best measure of a company's achievement.
(Solved)
Highlight three reasons why accounting profit might not be the best measure of a company's achievement.
Date posted:
April 11, 2022
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Answers (1)
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Differentiate between “Running yield and “flat yield”.
(Solved)
Differentiate between “Running yield and “flat yield”.
Date posted:
April 5, 2022
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Answers (1)
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The following data is available for Firm A
Required:
i. Overall break – even point in units.
ii. Degree of operating leverage.
iii. Degree of financial leverage.
iv. Degree of...
(Solved)
The following data is available for Firm A
Required:
i. Overall break – even point in units.
ii. Degree of operating leverage.
iii. Degree of financial leverage.
iv. Degree of total leverage.
Date posted:
April 5, 2022
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Answers (1)
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The following data show the capital structure of Samma Ltd.
The company’s current dividend yield is 5% while the tax rate is 30%.
Required:
The weighted marginal cost...
(Solved)
The following data show the capital structure of Samma Ltd.
The management of Samma Ltd. intends to invest in a project estimated to cost sh.16, 800,000.
The cost of the project will be raised as follows:
• Issue 10% 100 debentures at the current price of sh. 5,000.
• Issue 10% sh. 20 preference shares at the market price of sh. 25.
• Issue ordinary shares at the current market price of sh. 45 with floatation cost of 12%.
• Utilise 60% shares at the current market price of sh. 45. with floatation cost of 12%
The company’s current dividend yield is 5% while the tax rate is 30%.
Required:
The weighted marginal cost of capital.
Date posted:
April 5, 2022
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Answers (1)
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The capital structure of Savy Ltd. is as follows:
Required:
i) The company's growth in equity.
ii) The company's weighted average cost of capital (WACC).
(Solved)
The capital structure of Savy Ltd. is as follows:
Additional information:
1. Ordinary shares are currently quoted at Sh. 14 on the securities exchange.
2. Ordinary shares have a dividend cover of 3 times and an earnings per share (EPS) of Sh.6.
3. The 18% debentures were issued in 2006 at a price of Sh.l 00. They are due for redemption in
2014 at sh. 120
4. The company incurred Sh. 400,000 in floatation costs when raising the loan.
5. The company's tax rate is 30%.
Required:
i) The company's growth in equity.
ii) The company's weighted average cost of capital (WACC).
Date posted:
April 5, 2022
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Answers (1)
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The following is the capital structure of Ngana Ltd:
Required:
Using market values, calculate the weighted average cost of capital (WACC) of Ngana Ltd
(Solved)
The following is the capital structure of Ngana Ltd:
Additional information:
1. The shareholders of Ngana Ltd. expect earnings and dividends to grow at a constant rate of 5% in
the future. The company has just paid a dividend of Sh4.00 per share.
2. The current market price of one ordinary share of Ngana Ltd. is Sh.80.
3. Treasury bonds yield 12%. The return on the market is 14%. The company's beta is 1.50.
4. New preference shares can be sold at Sh. 120 per share with a dividend of Sh. 12 per share; and
floatation costs of Sh.6 per share.
5. The corporation tax rate is 30%.
6. The company pays out all its earnings as dividends.
7. The company will sell 12% debentures with a maturity of 10 years at Sh.90 per debenture. The
par value of the debenture is Sh.100.
Required:
Using market values, calculate the weighted average cost of capital (WACC) of Ngana Ltd
Date posted:
April 5, 2022
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Answers (1)
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Nice Ltd. is considering raising capital from an issue of ordinary shares and debentures in a mix that will maintain its gearing ratio constant.
The company...
(Solved)
Nice Ltd. is considering raising capital from an issue of ordinary shares and debentures in a mix that will maintain its gearing ratio constant.
The company has an issued share capital of ten million ordinary shares of Sh. 100 par value. It has also issued Sh.800 million of 8% debentures.
The current market value of the ordinary shares is Sh.476 and that of each debenture (Sh.100 par) is Sh.77. Dividends and interest are payable annually. An ordinary dividend has just been paid. The next instalment of interest is payable in the near future. Debentures are redeemable at par in 15 years’ time.
An extract from the most recent statement of financial position is as follows
Required:
Nice Ltd’s weighted average cost of capital (WACC).
Date posted:
April 5, 2022
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Answers (1)
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Hisa Limited has 1 million ordinary shares outstanding at the current market price of Sh.50 per
Share. The company requires Sh. 8 million to finance a...
(Solved)
Hisa Limited has 1 million ordinary shares outstanding at the current market price of Sh.50 per Share. The company requires Sh. 8 million to finance a proposed expansion project. The board of directors has decided to make a one for five rights issue at a subscription price of Sh. 40 per share.
The expansion project is expected to increase the firm’s annual cash inflow by Sh. 945,000.
Information on this project will be released to the market together with the announcement of the rights issue.
The company paid a dividend of Sh. 4.5 in the previous financial year. The dividend, together with the company’s earnings is expected to grow by 5% annually after investing in the expansion project
Required:
i) Compute the price of the shares after the commencement of the rights issue but before they start selling ex-rights
ii) Compute the theoretical ex-rights price of the shares.
iii) Compute the theoretical value of the rights when the shares are selling rights on.
iv) What would be the cum-rights price per share if the new funds are used to redeem a Sh. 8 million 10% debenture at par? (Assume a corporation tax rate of 30%)
Date posted:
April 5, 2022
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Answers (1)
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An investor received a dividend of Sh.1.50 in the current financial year on each of his ordinary shares. The par value per share is Sh.20....
(Solved)
An investor received a dividend of Sh.1.50 in the current financial year on each of his ordinary shares. The par value per share is Sh.20. The annual growth rate in dividends is 8%. The current market price per share is Sh1.50 while the investor’s required rate of return is 20%.
Calculate the intrinsic value of each ordinary share.
Date posted:
April 5, 2022
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Answers (1)
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Define the term “intrinsic value” with reference to the valuation of ordinary and preference shares.
(Solved)
Define the term “intrinsic value” with reference to the valuation of ordinary and preference shares.
Date posted:
April 5, 2022
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Answers (1)
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D. Magana’s investment portfolio comprises 490 shares in ABC Ltd. and sh. 20,000 deposited in a savings account. ABC Ltd. has declared a rights issue...
(Solved)
D. Magana’s investment portfolio comprises 490 shares in ABC Ltd. and sh. 20,000 deposited in a savings account. ABC Ltd. has declared a rights issue of one share for every five shares held at an issue of sh. 20 per share. The current market price per share of ABC Ltd. is sh. 35.
D. Magana would obtain the funds required to exercise the rights issue from the savings account. Similarly, proceeds from the sale of rights issue would be credited to the savings account.
Required:
i) The value of each right
ii) Analyze the effect of the rights issue on the value of D. Magana investment portfolio and hence advise him on whether to exercise, sell or ignore the rights issue. Ignore interest on the savings account.
Date posted:
April 5, 2022
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Answers (1)
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Mauzo Ltd. intends to declare a rights issue of one ordinary share for every five ordinary shares held as at 31 December 2007.
(Solved)
Mauzo Ltd. intends to declare a rights issue of one ordinary share for every five ordinary shares held as at 31 December 2007.
The current market price per share is sh. 16 but subscribers for the rights issue will be offered a 15%
discount. The balance sheet of the company as at 31 December 2007 was as follows:
Required:
a)
i) The theoretical ex- rights price per share.
ii) The value of rights per existing share.
b)
i) List three alternative actions available to the shareholders as regards to the rights issue.
ii) Determine the effect of each of the alternative actions listed in (b) (i) above on the wealth an
investor holding 1,000 shares in the company and hence advise the investor on the best course
of action.
Date posted:
April 5, 2022
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Answers (1)