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…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter18: Initial Public Offerings, Investment Banking, And Capital Formation

Section: Chapter Questions

Problem 5P

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Delta limited is considering the possibility of floating off one of its subsidiaries, Big Ice limited in the Ghana stock exchange. The profits of the subsidiary are GHS3.2 million per annum and these are expected to increase at 5% per annum. The book value of the net assets is GHS15 million and the market value is GHS20 million. The proposed annual dividend is GHS0.20 for each of the 10 million shares of GHS0. 50 pesewas. The company has a beta of 1.2. The risk free rate of interest is 8% and the price-earnings ratio on the market portfolio is 8. The market rate of return is 12.5%. Required: Estimate the share value of Delta limited using the following methods of share valuation 1) Earning basis 2).Dividend growth valuation 3) Capital assets pricing model
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.
To raise P50M for its expansion projects Barricade Security Industries is issuing 125,000 shares of preferred stock. If each share is guaranteed an annual dividend of P32.00, determine a)the par value of the stock, b) the cost of capital for the company. (Ans. P400/share; 8%)
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?
Ruby's Corporation needs to raise up its capital to RM80 million to expand its business. It plans to issue 20 million shares with a market value of RM2.50 per share, and the remaining of 30 million will be a debt financing through bonds. The par value and market value of each bond is RM1,000. The bonds pay annual interest before tax of 6.7%. The equity beta of firm is 1.5. The yield on risk free investment is 3% per year and the equity risk premium is approximately at 12% per year. The firm pays taxation at the annual rate 30%. From the above information, you are required to calculate: i. the after -tax cost of debt. ii. the cost of firm's equity. iii. the weighted average cost of capital based on your answers in part (i) and (ii).
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.
The Blue Boat Company currently has 2 million shares of common stock outstanding, along with RM 5 million in 10% bonds. The firm is considering a RM 10 million expansion program which will be financed with either: (1) all common stock at RM 50 a share, or (2) all bonds at a 12% interest rate. The tax rate is 28%. i. Find the EBIT indifference level associated with two financing proposals. ii. Prove that the EPS will be the same regardless of the plan chosen at the EBIT level found in part (I) above. iii. If the projected level of EBIT is RM 20 million, which alternative will yield a higher EPS?
Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the purchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows: Year Cash Flows (GH¢) 1 25,000 2 39,000 3 42,000 4 35,000 5 25,000 6 30,000 Required: Advise whether the company should buy the equipment or not using the NPV and profitability index Why would you prefer the NPV method to other methods of project evaluation?
Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the purchase using debt and equity. A loan (debt) of GH¢30,000 is to be sourced from GCB at an interest rate of 16% per annum. The remaining GH¢70,000 will be financed using equity. The firm is listed on the GSE with an equity beta of 2.5. The risk free rate of interest is 10% and the market risk premium is 10%%. The marginal tax rate of the firm is 25%. The equipment is expected to generate the following cash flows: Year Cash Flows (GH¢) 1 25,000 39,000 42,000 35,000 5. 25,000 6. 30,000 1. Advise whether the company should buy the equipment or not using the NPV and profitability index Why would you prefer the NPV method to other methods of project evaluation? 11. 4.
Pacific Filght PLC has in issue K500,000 10% irredeemable debentures. Investors currently require 8% return per annum. What will be the market value of the debt?
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

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