Light Speed plc requires £1,500,000 to fund a new project. The firm expects to earn an EBIT of £200,000 p.a. in perpetuity. Assume the project does not affect the operating risk of the company. The company intends to finance the project by issuing £1 million of 5% debentures at par and £1 million's worth of ordinary shares. The current capital structure of the company is as follows: MV (£'000) Debt (riskless) Equity The corporation tax rate is 25%. There is no time lag between taxable flows and the tax payments or receipts arising from those flows. Assume the required return on the market portfolio is 18% and the risk-free rate is 6%. Ignore income tax. 5,000 Required Return (%) 15,000 6 18 Required: Evaluate how the change of capital structure affects the company value and dividends. You should clearly specify your choice of gearing model and comment on how different models/assumptions made would/would not affect the results.

Light Speed plc requires £1,500,000 to fund a new project. The firm expects to earn an EBIT of £200,000 p.a. in perpetuity. Assume the project does not affect the operating risk of the company. The company intends to finance the project by issuing £1 million of 5% debentures at par and £1 million's worth of ordinary shares. The current capital structure of the company is as follows: MV (£'000) Debt (riskless) Equity The corporation tax rate is 25%. There is no time lag between taxable flows and the tax payments or receipts arising from those flows. Assume the required return on the market portfolio is 18% and the risk-free rate is 6%. Ignore income tax. 5,000 Required Return (%) 15,000 6 18 Required: Evaluate how the change of capital structure affects the company value and dividends. You should clearly specify your choice of gearing model and comment on how different models/assumptions made would/would not affect the results.

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

Problem 1PS

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JL Enterprises has 90,000 shares of stock outstanding with a book value of $1,343,000 and a market value of $1,560,000. The firm is considering a project that requires the purchase of $189,000 of fixed assets and has a net present value of $7,500. The project would be all-equity financed through the sale of shares. What will the new book value per share be after the project is implemented?
The finance director of Netra co wishes to estimate what impact the introduction of debt finance is likely to have on the company’s overall cost of capital. The company is currently financed only by equity. Ordinary Shares ( 25 cents par value ) 500,000 Reserves 1,100,000 Total Equity 1,600,000 The company’s current share price is 420 cents, and up to $4 million of fixed rate five year debt could be raised at an interest rate of 10% per year. The corporate tax rate is 33%.The current earnings before interest and tax are $2.5 million. These earnings are not expected to change significantly for the foreseeable future. The company is considering raising either: a) $2 million in debt finance; or b) $4 million in debt finance In either case the debt finance will be used to repurchase ordinary shares. Required: i) Using Modigliani and Miller’s model in a world with corporate tax, estimate…
Paragraph:Santa PLC is an all equity financed company with 100 million shares outstanding trading at €2 per share. Its management has decided to invest in a major new development that will cost € 40 million, and is now considering ways to finance the investment. Various alternatives have been considered but the choice has been narrowed down to a rights issue or the issue of debentures (a kind of bond).The rights issue would be made at a discount of 20% and be underwritten at a cost of 2% of the proceeds. The company’s chairman has discussed the proposed investment and its prospects as well as the financing possibilities, quite openly with various institutions and the financial press. As a result it is likely that the share price already reflects the implications of the company’s proposed investment.a) Determine the terms of the right issue, the ex-rights price and the theoretical value of the right.b) Explain and assess the view that rights issues are designed to protect the interests…
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The asset of a firm is financed by $100,000 Common Equity, $100,000 Preferred Stock, and $300,000 Bonds. The Weighted Average Cost of Capital (WACC) is 10%. Given that the asset is likely to generate Net Operating Profit After Tax of $100,000. What would be the firm’s EVA? Question 5 options: 1) $5,000 2) $50,000 3) $20,000 4) None of the above.
Particulate plc is an all-equity-financed business with a market value of £35 million and a cost of capital (after tax) of 20 per cent p.a. The business intends to purchase and cancel £8 million of equity finance using the cash raised from issuing 10 per cent irredeemable loan notes. The rate of corporation tax is 30 per cent. Assuming that the assumptions of Modigliani and Miller (in a world with taxes) are correct, how will the capital restructuring affect: (a) The market value of Particulate plc; (b) Its cost of equity; and (c) Its weighted average cost of capital?
please answer the question as in attached file asap. thanks
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A Company wants to seek additional source of external financing. The current book value structure of the company is as follows: GHS13% Debentures (GHS 100 per debenture)800,00014% Preference Shares (GHS 100 per share)200,000Equity Shares (GHS 10 per share)1,000,000The following external financing opportunities are: (i)A debenture with 10-year maturity, 4% flotation cost and current market price of GHS 100.(ii)A redeemable preference share with 10-year maturity, 5% floatation cost and current market price of GHS 100. (iii)Equity shares – GHS 2 per share flotation costs and current market price of GHS 22.Dividend expected on equity share at the end year is GHS 2 per share, anticipated growth rate in dividends is 7%. Company pays all its earnings in the form dividends. Corporate tax rate is 50%. Required – Calculate the WACC

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