Problem 7:The existing capital structure of ABC ltd is as follows:Equity shares of. Rs. 200 each Rs. 3000000Retained earnings Rs. 75000010% Preference shares Rs. 18750008% Debentures Rs. 1875000The company earns 12% on capital. The income tax rate is 40%. The company wants to raiseRs. 1875000 for its expansion project for which it is considering following alternatives:a. Issue of 15000 equity shares at a premium of Rs. 125 per shareb. Issue of 7% Preference sharesc. Issue of 9% Debentures. Calculate earnings per share and market price per share

The objective of the question is to calculate the earnings per share (EPS) and the market price per…

Answered: Problem 7: The existing capital…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Bb.9.
Suppose there are two alternatives to finance a power generation project planned by ABC (Pvt.) Ltd. Alternative A is to financing the total capital of Rs. 450 Mn with equity and Alternative B is to employ Rs.150 Mn equity, Rs. 100 Mn by 14% debentures and the rest by a 15% bank loan. The corporate tax rate is 30% and the owners expects 18% dividend in both alternatives. Earnings before interest and tax (EBIT) for the project is estimated as Rs.250 Mn. a. Calculate weighted average cost of capital (WACC) for both alternatives.
Lancaster Engineering Inc (LEI) has the following capital structure, which it considers to be optimal. Long Term Debt 30% Preferred Stock 10% Common Stock 60% Total 100% LEI can obtain capital in the following ways: New Preferred Stock with a dividend of $12 can be sold at $97 to the public; however LEI will incur $2 of flotation costs for each share it sells. Debt can be sold at a pre-tax cost of 12%. LEIâs tax rate is 40%. (Note that 12% is the pre-tax cost; all costs must be expressed on an after-tax basis so as to be comparable.) LEI can sell its common stock for $55. However they expect underwriting fees to be $3 per share and an additional $2 per share in other flotation costs. They expect to pay a dividend on the common stock next year of $3.50 and it is expected that dividends will continue to grow at the historical rate of 8%. Required: Determine the cost of each capital component. Determine the weighted average cost of capital (WACC) for LEI.
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.
4. A company that has an EPS of $ 7.00, with sales of $ 1,000,000.00, share capital of $ 2,500,000.00 with a value of $ 100.00 per share, that expects to maintain its sales and that wants to estimate what would happen if it modified its capital structure with a debt of 25 %, 50% and 75% with interest rates of 10%, 12% and 18% respectively, you can be sure of:a) That its EPS will increase as the capital structure is increasingly transferred to debt.b) That its EPS will remain the same regardless of the capital structure chosen.c) That its EPS will decrease as the capital structure is increasingly transferred to debt.
ABC collmpany uses only debt equity. It can borrow unlimited at an interest rate of 10% as long as it finances At its target capital structure, which calls for 50% debt and 50% equity. Its last dividend was $1.46, it's expected constant growth rate is 8% and it's stock still sells for $24. ABC companies tax rate is 21%. Four projects are available project A cost $250 million in return = 13% project B cost 125 milion return = 12% project C cost $200 million and return = 11% project D cost $150 million and return = 10%. 1a) what is ABC Companys cost of common stock? 1b) What is ABC Company's WACC? 1c) What should be the optimal budget?
A firm has target debt-equity ratio of 0.60. The flotation cost for equity is 5% and the flotation cost for debt is 3%. The firm needs $10,000,000 investment to undertake a project. How much should the firm raise to account for flotation costs and the initial investment need of the project? O $10,395,010 O $10,416,667 $11,000,821 $10,572,912 O $10,443,864
Table 9.1 A firm has determined its optimal capital structure which is composed of the following sources and target market value proportions. Source of Capital Long-term debt Preferred stock Common stock equity Target Market Proportions OA. 8.13 percent OB. 4.67 percent OC. 8 percent O D. 3.25 percent 20% 10 70 Debt: The firm can sell a 12-year, $1,000 par value, 7 percent bond for $960. A flotation cost of 2 percent of the face value would be required in addition to the discount of $40. Preferred Stock: The firm has determined it can issue preferred stock at $75 per share par value. The stock will pay a $10 annual dividend. The cost of issuing and selling the stock is $3 per share. Common Stock: A firm's common stock is currently selling for $18 per share. The dividend expected to be paid at the end of the coming year is $1.74. Its dividend payments have been growing at a constant rate for the last four years. Four years ago, the dividend was $1.50. It is expected that to sell, a new…
Multiple choice: Assuming that a company’s project is to be funded as follows: 40% from bank loan, 30% from issuance of ordinary shares, and 30% from issuance of preference shares. Per company’s computations, the after tax cost of capital are as follows: 10%, 20% and 12% for bank loan, ordinary shares, and preference shares, respectively. If the tax rate is 30%, which cost of capital (rounded off) should the company use? • 10%• 5%• 30%• 14%
ABC Inc. has a the capital structure shown below. Liabilities Stockholders' Equity $122,099,000 $95,228,000 ABC Inc. will raise additional capital for new projects this year, in the amount of $44,978,000. The firm believes, however, that a capital structure with 56.25% debt is ideal. The firm will be able to issue new discount bonds at a price of $909 with a yield-to-maturity of 3%. Assuming they want to change their capital structure to the new target, how many new bonds will the firm need to issue? unur answer to the nearest bond.
3:44 (Capital structure analysis) The Karson Transport Company currently has net operating income of $496,000 and pays interest expense of $190,000. The company plans to borrow $1.14 million on which the firm will pay 11 percent interest. The borrowed money will be used to finance an investment that is expected to increase the firm's net operating income by $397,000 a year. a. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? b. What effect will the loan and the investment have on the firm's times interest earned ratio? a. What is Karson's times interest earned ratio before the loan is taken out and the investment is made? The times interest earned ratio is ||| Vo) 1 LTE2.II 4G = times. (Round to two decimal places.) O 59%

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