You are a personal investor investigating the possibility of investing in Pulleys and Plugs Ltd. Whic is a taxation category 2 company. You have a required rate of return of 10% per annum and, as sucl need to identify the rate of return demanded by the investors in Pulleys and Plugs to compare to you required rate. You have identified the following characteristics of Pulleys and Plugs. The latest balance sheet for the Pulleys and Plugs shows: Long Term Debt Book Value ($) Bonds: Issued at par: $100 6,000,000 Annual coupon of 14% 8 years to maturity Еquity Preference Shares: 1,000,000 100,000 shares outstanding Ordinary Shares: 5,000,000 5,000,000 shares outstanding The company's bank has advised that the interest rate on any new debt finance provided for new projec would be 9% p.a. The company's preference shares currently sell for $13.56 each and pay an annual dividend of $2.2C The company's existing ordinary shares currently sell for $0.87 each and pay a dividend per share c $O.10 which has just been paid to shareholders. Historically, dividends have increased at an annual rat of 5% p.a. and are expected to continue to do so in the future. Pulleys and Plugs' company tax rate is 30%. REQUIRED: a) Determine the market value proportions of debt, preference shares and ordinary equity comprisin the company's capital structure. b) Calculate the after-tax costs of capital for each source of finance. c) Determine the after-tax weighted average cost of capital for the company. d) How does the cost of debt capital relate to the value of a debt security? e) Based on your calculations determine whether it is a good idea (or not) to invest in Pulleys and Plugs.
You are a personal investor investigating the possibility of investing in Pulleys and Plugs Ltd. Whic is a taxation category 2 company. You have a required rate of return of 10% per annum and, as sucl need to identify the rate of return demanded by the investors in Pulleys and Plugs to compare to you required rate. You have identified the following characteristics of Pulleys and Plugs. The latest balance sheet for the Pulleys and Plugs shows: Long Term Debt Book Value ($) Bonds: Issued at par: $100 6,000,000 Annual coupon of 14% 8 years to maturity Еquity Preference Shares: 1,000,000 100,000 shares outstanding Ordinary Shares: 5,000,000 5,000,000 shares outstanding The company's bank has advised that the interest rate on any new debt finance provided for new projec would be 9% p.a. The company's preference shares currently sell for $13.56 each and pay an annual dividend of $2.2C The company's existing ordinary shares currently sell for $0.87 each and pay a dividend per share c $O.10 which has just been paid to shareholders. Historically, dividends have increased at an annual rat of 5% p.a. and are expected to continue to do so in the future. Pulleys and Plugs' company tax rate is 30%. REQUIRED: a) Determine the market value proportions of debt, preference shares and ordinary equity comprisin the company's capital structure. b) Calculate the after-tax costs of capital for each source of finance. c) Determine the after-tax weighted average cost of capital for the company. d) How does the cost of debt capital relate to the value of a debt security? e) Based on your calculations determine whether it is a good idea (or not) to invest in Pulleys and Plugs.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:You are a personal investor investigating the possibility of investing in Pulleys and Plugs Ltd. Which
is a taxation category 2 company. You have a required rate of return of 10% per annum and, as such,
need to identify the rate of return demanded by the investors in Pulleys and Plugs to compare to your
required rate. You have identified the following characteristics of Pulleys and Plugs.
The latest balance sheet for the Pulleys and Plugs shows:
Long Term Debt
Book Value ($)
Bonds:
Issued at par: $100
6,000,000
Annual coupon of 14%
8 years to maturity
Equity
Preference Shares:
1,000,000
100,000 shares outstanding
Ordinary Shares:
5,000,000
5,000,000 shares outstanding
The company's bank has advised that the interest rate on any new debt finance provided for new projects
would be 9% p.a.
The company's preference shares currently sell for $13.56 each and pay an annual dividend of $2.20.
The company's existing ordinary shares currently sell for $0.87 each and pay a dividend per share of
$0.10 which has just been paid to shareholders. Historically, dividends have increased at an annual rate
of 5% p.a. and are expected to continue to do so in the future.
Pulleys and Plugs' company tax rate is 30%.
REQUIRED:
a) Determine the market value proportions of debt, preference shares and ordinary equity comprising
the company's capital structure.
b) Calculate the after-tax costs of capital for each source of finance.
c) Determine the after-tax weighted average cost of capital for the company.
d) How does the cost of debt capital relate to the value of a debt security?
e) Based on your calculations determine whether it is a good idea (or not) to invest in Pulleys and
Plugs.
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