Orange Ltd is evaluating the purchase of a new machine to produce a new product. You are employed as a business analyst in the company and you have been asked to assess this investment opportunity. The first item on your agenda is to calculate the cost of capital of Orange plc so you can apply it to the project. To help you with this the finance director has given you the following information in relation to earnings and the capital structure of the company. 40% of the earnings are paid out as dividend each year Year Earnings €2,750,000 1 2 12% Debentures 10% Irredeemable Bonds €2,850,000 Balance Sheet extract Ordinary Shares at 0.50 cent each 3 €2,960,000 4 Required: Part a Determine the cost of equity for Orange Plc 5 € €3,080,000 €3,210,000 €3,350,000 6 6,000,000 2,000,000 1,500,000 The company has been quoted on the stock exchange for a number of years and the current share price is €2.8 ex dividend. The current market value of the debentures is €113 per €100 nominal value. The debentures are redeemable in 5 years' time. The irredeemable bonds are currently trading at €105 per €100 nominal. Taxation is at 12% and is payable one year in arrears
Orange Ltd is evaluating the purchase of a new machine to produce a new product. You are employed as a business analyst in the company and you have been asked to assess this investment opportunity. The first item on your agenda is to calculate the cost of capital of Orange plc so you can apply it to the project. To help you with this the finance director has given you the following information in relation to earnings and the capital structure of the company. 40% of the earnings are paid out as dividend each year Year Earnings €2,750,000 1 2 12% Debentures 10% Irredeemable Bonds €2,850,000 Balance Sheet extract Ordinary Shares at 0.50 cent each 3 €2,960,000 4 Required: Part a Determine the cost of equity for Orange Plc 5 € €3,080,000 €3,210,000 €3,350,000 6 6,000,000 2,000,000 1,500,000 The company has been quoted on the stock exchange for a number of years and the current share price is €2.8 ex dividend. The current market value of the debentures is €113 per €100 nominal value. The debentures are redeemable in 5 years' time. The irredeemable bonds are currently trading at €105 per €100 nominal. Taxation is at 12% and is payable one year in arrears
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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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
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Question 2
Orange Ltd is evaluating the purchase of a new machine to produce a new product.
You are employed as a business analyst in the company and you have been asked to
assess this investment opportunity.
The first item on your agenda is to calculate the cost of capital of Orange plc so you
can apply it to the project. To help you with this the finance director has given you the
following information in relation to earnings and the capital structure of the company.
40% of the earnings are paid out as dividend each year
Year
1
4
Earnings
€2,750,000 €2,850,000 €2,960,000 €3,080,000 €3,210,000 €3,350,000
Balance Sheet extract
Ordinary Shares at 0.50 cent each
6,000,000
12% Debentures
2,000,000
1,500,000
10% Irredeemable Bonds
The company has been quoted on the stock exchange for a number of years and the
current share price is €2.8 ex dividend. The current market value of the debentures is
€113 per €100 nominal value. The debentures are redeemable in 5 years' time. The
irredeemable bonds are currently trading at €105 per €100 nominal.
Taxation is at 12% and is payable one year in arrears
Required :
Part a
Determine the cost of equity for Orange Plc
Part b
Determine the cost of debt for Orange Plc.
Part c
Determine the weighted average cost of capital(WACC) for Orange Plc
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