The following figures have been extracted from the financial statements of KND Ltd: Book Value of Current Assets $45 million and Current Liabilities $34.75 million 11% Debentures: $27 million debentures issued at $1,000. Long-term Loan: $7.18 million Preference Share Capital: 8.8 million shares issued at $2 per share Retained Earnings: $28.30 million Ordinary Share Capital: 39 million shares issued at $1 per share General Reserves $9.20 million The following additional information has been provided by the manager of the company: Government bonds are currently yielding 6.3% per annum. The current market return on equity is estimated to be 13.5% per annum. Debenture coupons are paid annually, with 16 years to maturity. The company tax rate is 34%. The loan requires a 9% p.a. interest payment, compounded monthly. A merchant banker suggests that KND Ltd would have to offer a rate of 13.9% p.a. on any new issue of 16-year debentures. 12% Preference shares of KND Ltd are currently traded at $3.79 per share KND Ltd ordinary shares have recently traded at $3.61 and the company's financial manager believes that a beta of 1.7 is appropriate for the company. A). Using relevant information, estimate the weighted average cost of capital for KND Ltd. Round your answer to 4 decimal points, for example, if your answer is 12.3476%, write as 0.1235. B). Using your own words, explain the use of WACC along with the CAPM for evaluating prospective projects.
The following figures have been extracted from the financial statements of KND Ltd: Book Value of Current Assets $45 million and Current Liabilities $34.75 million 11% Debentures: $27 million debentures issued at $1,000. Long-term Loan: $7.18 million Preference Share Capital: 8.8 million shares issued at $2 per share Retained Earnings: $28.30 million Ordinary Share Capital: 39 million shares issued at $1 per share General Reserves $9.20 million The following additional information has been provided by the manager of the company: Government bonds are currently yielding 6.3% per annum. The current market return on equity is estimated to be 13.5% per annum. Debenture coupons are paid annually, with 16 years to maturity. The company tax rate is 34%. The loan requires a 9% p.a. interest payment, compounded monthly. A merchant banker suggests that KND Ltd would have to offer a rate of 13.9% p.a. on any new issue of 16-year debentures. 12% Preference shares of KND Ltd are currently traded at $3.79 per share KND Ltd ordinary shares have recently traded at $3.61 and the company's financial manager believes that a beta of 1.7 is appropriate for the company. A). Using relevant information, estimate the weighted average cost of capital for KND Ltd. Round your answer to 4 decimal points, for example, if your answer is 12.3476%, write as 0.1235. B). Using your own words, explain the use of WACC along with the CAPM for evaluating prospective projects.
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
Related questions
Question
The following figures have been extracted from the financial statements of KND Ltd:
- Book Value of Current Assets $45 million and Current Liabilities $34.75 million
- 11% Debentures: $27 million debentures issued at $1,000.
- Long-term Loan: $7.18 million
Preference Share Capital: 8.8 million shares issued at $2 per shareRetained Earnings : $28.30 million- Ordinary Share Capital: 39 million shares issued at $1 per share
- General Reserves $9.20 million
The following additional information has been provided by the manager of the company:
- Government bonds are currently yielding 6.3% per annum.
- The current market
return on equity is estimated to be 13.5% per annum. - Debenture coupons are paid annually, with 16 years to maturity.
- The company tax rate is 34%.
- The loan requires a 9% p.a. interest payment, compounded monthly.
- A merchant banker suggests that KND Ltd would have to offer a rate of 13.9% p.a. on any new issue of 16-year debentures.
- 12% Preference shares of KND Ltd are currently traded at $3.79 per share
- KND Ltd ordinary shares have recently traded at $3.61 and the company's
financial manager believes that a beta of 1.7 is appropriate for the company.
A). Using relevant information, estimate the weighted average cost of capital for KND Ltd. Round your answer to 4 decimal points, for example, if your answer is 12.3476%, write as 0.1235.
B). Using your own words, explain the use of WACC along with the
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education