Accounting provide correct answer The Bidvest Group Limited headquartered in CapeTown has 50,000 shares valued at R820k and debtof R160k. The interest rate is 10% and the currentprincipal payment is 25%. It intends to expand theoperation and expects EBIT of R210K to increaseby half (50%). It can raise the required R300K byeither borrowing or selling new shares. BidvestGroup can issue 15k shares at a price of R20 each.Debt levels can be raised to 12% with a principalpayment of 5%. Determine the following:ROE with the increased debt.

Step 1:- Define Return on EquityThe amount of money the shareholders get in return from the company…

Answered: The Bidvest Group Limited headquartered…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 20P

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Zola Sdn Bhd wants to develop new product through research and development whichrequires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options: i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually Calculate the after-tax cost of: i) Bond ii) Preferred shares iii) Common shares iv) Which source should the firm choose? Why?
Zola Sdn Bhd wants to develop new product through research and development whichrequires additional financing of RM2 million. Zola Sdn Bhd is considering selling one security to raise the needed funds from the following options: i. To sell bonds at RM950,14 percent coupon rate with maturity of 15 years. The underwriting fee is 8 percent of market price. The tax rate for the company is 35 percent. ii. To sell preferred shares at RM85 with 9 percent dividend and RM5 for issuing cost. iii. To issue new common shares at RM23 per share and RM1.20 for floatation cost. The company has just paid RM0.80 in dividend and the earnings is expected to grow at 9 percent annually Calculate the after-tax cost of: i) Bond ii) Preferred shares iii) Common shares iv) Which source should the firm choose? Why? Please use YTM method to calculate the bond.
Gravity Company needs to raise $49.5 million to fund its expansion plans. The company will sell shares at a price of $28.30 in a general cash offer and the company's underwriters will charge a spread of 6 percent. How many shares need to be sold?
Rock Industries has hired the investment banking firm to help for going public. Rock and investment bank agree that Rock's current value of equity is $75 million. Rock currently has 5 million shares outstanding and will issue 2 million new shares. Investment bank charges a 7% spread. What is the offer price based on this information? a. $10.93 b. $15.00 c. $14.59 d. $10.71
The Management of "Tanjung Uda Berhad" is planning a RM4,000,000 expansion this year. The expansion can be financed by issuing either common shares of bonds. The new common share can be sold for RM$5 per share. The bonds can be issued with a 12% coupon rates. The firm's existing preference share pay dividends of RM$2 per share. The company's corporate income tax is 30%. The financial statement of Tanjung Uda Berhad is as follow:- Current Assets Fixed Assets Current Liabilities Bonds: (8.5%, RM1,000 par value) (9%, RM1,000 par Value) Preference Shares (RM$ 100 par value) Ordinary Shares (RM$ 2 par value) Retained Earnings Tanjung Uda Berhade Balance Sheet as at 31st December 2022 RM$ 2,000,000+ RM$ 8,000,000+ RM$ 10,000,000 RM$ 1,500,000 RM$ 4,000,000 RM$ 1,000,000+ RM$ 500,000+ RM$ 2,400,000+ RM$ 600,000+ RM$ 10,000,000+ Required: a) Calculate the WACC for the company without taking into consideration the expansion plan mentioned above, which means using the original Balance sheet…
Soylent Corp is considering to raise new capital for expansion. The company has the following alternatives: Option 1: Issue $1 million bonds at interest rate of 10.5% Option 2: Issue new shares at issue price of $5.00 per share. The present total market capitalisation of Soylent Corp is as follows: 500,000 common stocks with par value of $1.00 per share with current market price of $5.00 $2,500,000 10% coupon bonds valued at par $500,000 Current EBIT is $466,500 and the company is in the 40% tax bracket. Current P/E ratio is 10. With the expansion, Soylent Corp has developed an EBIT estimates of $780,000. Depending on the financing option chosen, the P/E ratio is expected to change as follows: Expected New P/E Option 1 (debt issue) 8 Option 2 (common stock issue) 11 Which financing option should be chosen? Why?
A group of investors decides to invest RM500,000 in the stocks of three companies.Company D sells for RM60 a share and has a growth of 16% per year. Company E sells forRM80 per share and has a growth of 12% per year. Company F sells for RM30 a share andhas a growth of 9% per year. The group plans to buy four times as many shares of company Fas of company E. If the group’s goal is 13.68% growth per year, how many shares of eachstock should the investors buy? [Solve this question by the method of inverse]
ABC Ltd. needs Rs 500 lacs for an expansion plan that is expected to yield 15% return on assets. Currently its return on asset is 12% and the firm is all equity funded. For expansion it has alternatives of funding the entire expenditure either through debt or equity. Following information is available: Nos. of shares already existing 20 lacs Price at which the shares can be issued (Rs) Rs 50 Existing interest Rs 30 lacs Interest rate on debt 10% Tax rate 40% Find out the new EPS with equity and debt financing. Also find at what level of earnings the firm is indifferent to mode of financing.
Schwifty Enterprises has currently 20 million shares trading in financial markets at a price of £10 per share. They decide to do a 1 for 4 rights issue. The issue price is £5 per share. What would be the ex-rights price per share? (to the closest integer).
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow FCF0 is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5% and the market risk premium is 6%. Hastings’s first step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.) What is the current intrinsic value of Vandell’s stock
Brown Mines needs $1.2 billion of new equity.Market price is $25.Brown Mines decides to raise addtional funds by offering the right to buy 4 new shares for 16 at $12 per share.WIth 100% subscription,what is value of each right? A.$10.4 B.8 C.16 D.9.6
XYZ Company has currently and equity share capital of Rs. 40 lakhs consisting of 40,000 equity shares of Rs. 100 each. The management is planning to raise another Rs. 30 lakhs to finance a major programme of expansion through one of the two possible financing plans. The options are:A: Entirely through equity sharesB: Rs. 15 lakhs in equity shares of Rs. 100 each and the balance in 8% debentures.The company’s EBIT will be Rs. 15 lakhs. Assuming corporate tax of 50%. Determine the EPS and financial leverage.

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