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3. W&N (Pty) Ltd is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Structure B Source of Capital Structure A Long-term debt R75,000 @ 16% coupon rate Preferred stock R10,000 with an 18% dividend R50,000 @ 15% coupon rate R15,000 with an 18% annual dividend Common stock 8,000 shares 10,000 shares a) Calculate two EBIT-EPS co-ordinates for each of the structures. Use EBIT of R40,000 and R60,000 (when making comparisons R30,000 and R50,000 apply to both structure A and B). Find their associated EPS values. /4/ /3/ b) Plot the two capital structures on a set of EBIT-EPS axes. (Please label your graph). /3/ c) Indicate over what EBIT range, if any, each structure is preferred. d) Discuss the leverage and risk aspects of each structure. /3/ e) Which structure would you recommend if the firm expects its EBIT to be R35,000. Explain. /3/ 4. Jane is 22 years old and is planning for her retirement at age 62 (ie first payment at 63). She plans to save R5000 per year for the next 15 years. She wants to have retirement income of R85,000 per year for 20 years. How much must Jane save each year from age 37 to retirement in order to achieve her retirement goal. Assume she plans to invest in a diversified stock and bond mutual fund that will earn 8.5% per year on average (assume same interest rate throughout) % 5. A firm has accounts receivables of 526935, sales just ended of 4181837. a) What is the average collection period? Assume 360 days in a year. 15/ /2/ 22 b) If credit terms are 30 days, is this a good reflection on the company? Why? 12/ No 6. A firm has sales of R20 million, total assets of R60 million and total debt of R9 million. The net profit margin is 12%. a) What is the net profit? b) ROE? /2/ 12/ e nc

3. W&N (Pty) Ltd is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Structure B Source of Capital Structure A Long-term debt R75,000 @ 16% coupon rate Preferred stock R10,000 with an 18% dividend R50,000 @ 15% coupon rate R15,000 with an 18% annual dividend Common stock 8,000 shares 10,000 shares a) Calculate two EBIT-EPS co-ordinates for each of the structures. Use EBIT of R40,000 and R60,000 (when making comparisons R30,000 and R50,000 apply to both structure A and B). Find their associated EPS values. /4/ /3/ b) Plot the two capital structures on a set of EBIT-EPS axes. (Please label your graph). /3/ c) Indicate over what EBIT range, if any, each structure is preferred. d) Discuss the leverage and risk aspects of each structure. /3/ e) Which structure would you recommend if the firm expects its EBIT to be R35,000. Explain. /3/ 4. Jane is 22 years old and is planning for her retirement at age 62 (ie first payment at 63). She plans to save R5000 per year for the next 15 years. She wants to have retirement income of R85,000 per year for 20 years. How much must Jane save each year from age 37 to retirement in order to achieve her retirement goal. Assume she plans to invest in a diversified stock and bond mutual fund that will earn 8.5% per year on average (assume same interest rate throughout) % 5. A firm has accounts receivables of 526935, sales just ended of 4181837. a) What is the average collection period? Assume 360 days in a year. 15/ /2/ 22 b) If credit terms are 30 days, is this a good reflection on the company? Why? 12/ No 6. A firm has sales of R20 million, total assets of R60 million and total debt of R9 million. The net profit margin is 12%. a) What is the net profit? b) ROE? /2/ 12/ e nc

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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3. W&N (Pty) Ltd is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Structure B Source of Capital Structure A Long-term debt R75,000 @ 16% coupon rate Preferred stock R10,000 with an 18% dividend R50,000 @ 15% coupon rate R15,000 with an 18% annual dividend Common stock 8,000 shares 10,000 shares a) Calculate two EBIT-EPS co-ordinates for each of the structures. Use EBIT of R40,000 and R60,000 (when making comparisons R30,000 and R50,000 apply to both structure A and B). Find their associated EPS values. /4/ /3/ b) Plot the two capital structures on a set of EBIT-EPS axes. (Please label your graph). /3/ c) Indicate over what EBIT range, if any, each structure is preferred. d) Discuss the leverage and risk aspects of each structure. /3/ e) Which structure would you recommend if the firm expects its EBIT to be R35,000. Explain. /3/ 4. Jane is 22 years old and is planning for her retirement at age 62 (ie first payment at 63). She plans to save R5000 per year for the next 15 years. She wants to have retirement income of R85,000 per year for 20 years. How much must Jane save each year from age 37 to retirement in order to achieve her retirement goal. Assume she plans to invest in a diversified stock and bond mutual fund that will earn 8.5% per year on average (assume same interest rate throughout) % 5. A firm has accounts receivables of 526935, sales just ended of 4181837. a) What is the average collection period? Assume 360 days in a year. 15/ /2/ 22 b) If credit terms are 30 days, is this a good reflection on the company? Why? 12/ No 6. A firm has sales of R20 million, total assets of R60 million and total debt of R9 million. The net profit margin is 12%. a) What is the net profit? b) ROE? /2/ 12/ e nc
Transcribed Image Text:3. W&N (Pty) Ltd is considering two capital structures. The key information is shown in the following table. Assume a 40% tax rate. Structure B Source of Capital Structure A Long-term debt R75,000 @ 16% coupon rate Preferred stock R10,000 with an 18% dividend R50,000 @ 15% coupon rate R15,000 with an 18% annual dividend Common stock 8,000 shares 10,000 shares a) Calculate two EBIT-EPS co-ordinates for each of the structures. Use EBIT of R40,000 and R60,000 (when making comparisons R30,000 and R50,000 apply to both structure A and B). Find their associated EPS values. /4/ /3/ b) Plot the two capital structures on a set of EBIT-EPS axes. (Please label your graph). /3/ c) Indicate over what EBIT range, if any, each structure is preferred. d) Discuss the leverage and risk aspects of each structure. /3/ e) Which structure would you recommend if the firm expects its EBIT to be R35,000. Explain. /3/ 4. Jane is 22 years old and is planning for her retirement at age 62 (ie first payment at 63). She plans to save R5000 per year for the next 15 years. She wants to have retirement income of R85,000 per year for 20 years. How much must Jane save each year from age 37 to retirement in order to achieve her retirement goal. Assume she plans to invest in a diversified stock and bond mutual fund that will earn 8.5% per year on average (assume same interest rate throughout) % 5. A firm has accounts receivables of 526935, sales just ended of 4181837. a) What is the average collection period? Assume 360 days in a year. 15/ /2/ 22 b) If credit terms are 30 days, is this a good reflection on the company? Why? 12/ No 6. A firm has sales of R20 million, total assets of R60 million and total debt of R9 million. The net profit margin is 12%. a) What is the net profit? b) ROE? /2/ 12/ e nc
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