Company XYZ Ltd. manufactures household items and has been working in this sector for the last 80 years. This Company has total assets of 110 million Rupees. The Company’s accounting information indicates that these assets are financed with 60% debt and 40% equity. The Company has adopted different ways to generate capital. . Also, The Company issues both preferred and common stocks different types of bonds are sold by this Company to accomplish capital requirements. Furthermore, loan from financial institutions has also been taken by the Company for 60 million Rupees. Due to the prevailing situation of the Covid-19 pandemic, the Company is facing a decline in sales. The management of the Company is working to control this loss to keep their operations smooth. For this purpose, Company has hired two analysts from the market whose major duty is to propose plans to control costs for the Company as the Company has generated funds by issuance of Coupon bonds with a nine-year maturity period. The coupon rate offered to investors is 16% per bond with Rs.1000 par value. The current market price of the bond is observed as Rs.780. However, investors required rate of return has changed due to the current pandemic situation. Therefore Company wants to calculate the discount rate that sets the present value of the expected future cash flow stream equal to the bond current market price; this is because the yield on this bond needs to be considered for future capital mix assessment. Furthermore, the Company is also selling 15% preferred stock issue at Rs.100 par value and at a current price of Rs.75 a share, there would need to calculate the cost of this stock to decide whether Company should issue new stocks in future or not. Moreover, the Company has announced Rs.7 dividend this year. According to investor’s expectations, it would grow at the rate of 9% for the next 3 years, then at the rate of 8% for the next 3 years and then at the rate of 7% thereafter. However, the required rate of return of investors prevailing in the market is 15%. The Company is also intending to calculate the intrinsic value of its share to check whether its security is overpriced or not in the market with respect to its competitors in the same industry. The Company is also interested in new investment opportunities which could generate more revenues in future. The analysts have suggested that Company can generate enough funds after 10 years if it would deposit at least Rs.40, 00,000 today. For this purpose, two financial institutions are highlighted by them which are offering maximum return in the market. Institution A is offering a 14% interest rate semiannually, while institution B is offering 13% quarterly. So there is a need to calculate the cash position of the Company after 10 years from these two alternatives to choose an appropriate plan. The analysts have also suggested the management follow different annuity and perpetuity concepts while issuing and evaluating their bonds so that the best options would be chosen while issuing new securities. Therefore there is also a need to explain these concepts before the Board of Directors to get a depth understanding of the calculation of the intrinsic value of securities by using different types of annuities as well as perpetuity plans. Carefully read the information provided above and calculate the following items for Company XYZ Ltd. Q4:- Calculate amounts offered by financial institutions on investment plans after 10 years. Q5:- Explain different types of Annuity and perpetuity concepts with appropriate examples.
Company XYZ Ltd. manufactures household items and has been working in this sector for the last 80 years. This Company has total assets of 110 million Rupees. The Company’s accounting information indicates that these assets are financed with 60% debt and 40% equity. The Company has adopted different ways to generate capital. . Also, The Company issues both preferred and common stocks different types of bonds are sold by this Company to accomplish capital requirements. Furthermore, loan from financial institutions has also been taken by the Company for 60 million Rupees.
Due to the prevailing situation of the Covid-19 pandemic, the Company is facing a decline in sales. The management of the Company is working to control this loss to keep their operations smooth. For this purpose, Company has hired two analysts from the market whose major duty is to propose plans to control costs for the Company as the Company has generated funds by issuance of Coupon bonds with a nine-year maturity period. The coupon rate offered to investors is 16% per bond with Rs.1000 par value. The current market price of the bond is observed as Rs.780. However, investors required
Furthermore, the Company is also selling 15%
Moreover, the Company has announced Rs.7 dividend this year. According to investor’s expectations, it would grow at the rate of 9% for the next 3 years, then at the rate of 8% for the next 3 years and then at the rate of 7% thereafter. However, the required rate of return of investors prevailing in the market is 15%. The Company is also intending to calculate the intrinsic value of its share to check whether its security is overpriced or not in the market with respect to its competitors in the same industry.
The Company is also interested in new investment opportunities which could generate more revenues in future. The analysts have suggested that Company can generate enough funds after
10 years if it would deposit at least Rs.40, 00,000 today. For this purpose, two financial institutions are highlighted by them which are offering maximum return in the market. Institution A is offering a 14% interest rate semiannually, while institution B is offering 13% quarterly. So there is a need to calculate the cash position of the Company after 10 years from these two alternatives to choose an appropriate plan.
The analysts have also suggested the management follow different
Carefully read the information provided above and calculate the following items for Company XYZ Ltd.
Q4:- Calculate amounts offered by financial institutions on investment plans after 10 years.
Q5:- Explain different types of Annuity and perpetuity concepts with appropriate examples.
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