Mokoko Ltd. is considering a number projects and thus need to estimate its cost of capital in order to estimate their NPV. The company’s current dividend is $2.25 per share, which has grown steadily at 6% each year for over a decade and is expected to continue doing so. Its stock currently trades at $26 and there are 2 million shares outstanding. The company’s 100,000 preferred shares trade at $22 and pay annual dividends of $3. Cash and marketable securities on the company’s balance sheet total $30.5 million and the firm pays a tax rate of 30%. Their existing long-term debt (face value of $100 million, semi-annual payments) pays a 9.5% coupon and has 12 years remaining before maturity. Due to current conditions, the required rate of return (yield to maturity) on this debt is 11% and any new debt issuance would be required to offer the same yield to investors (there is no term premium for 1 year vs 12 year debt). What is Mokoko Ltd's Debt/Equity ratio? Assuming the firm wants to maintain its current capital structure, how much debt can Mokoko issue before having to issue new equity?
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
Mokoko Ltd. is considering a number projects and thus need to estimate its cost of capital in order to estimate their
The company’s current dividend is $2.25 per share, which has grown steadily at 6% each year for over a decade and is expected to continue doing so. Its stock currently trades at $26 and there are 2 million shares outstanding. The company’s 100,000
Their existing long-term debt (face value of $100 million, semi-annual payments) pays a 9.5% coupon and has 12 years remaining before maturity. Due to current conditions, the required
- What is Mokoko Ltd's Debt/Equity ratio?
- Assuming the firm wants to maintain its current capital structure, how much debt can Mokoko issue before having to issue new equity?
Step by step
Solved in 3 steps with 2 images
