A company has a share capital of RM1,000,000 fully paid. However, it has made losses and now has a retained loss of RM600,000. Explain why you would consider that a capital reduction scheme would be appropriate, and briefly explain the process of undertaking such a scheme.
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A company has a share capital of RM1,000,000 fully paid. However, it has made losses and now has a retained loss of RM600,000. Explain why you would consider that a capital reduction scheme would be appropriate, and briefly explain the process of undertaking such a scheme.
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- 1. In its most recent year, HiFlyer Plc’s return on capital was 50% on the reportedninvested capital of $2 billion. An analyst decides to treat Research and Development expenditure as capital expenditure and estimates the value of the research asset to be $1 billion. The Research and Development expenditure was $300 million and the amortisation of the research asset was $200 million. There is no tax. b. Do you agree with the analyst’s decision to treat R&D expenses as capex? Give reasons for your answerLast year Rosenberg Corp. had $195, 000 of assets, S18,775 of net income, and a debt-to-total-assets ratio of 32%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE? Question 5 options: 4.36% 4.57% 4.80% 5.04%When analysing a company, the equity sales person has noticed that the company has incurred a large development cost relating to a new product and has stated that the costs meet the necessary criterion to be capitalised. The analyst feels a more reasonable treatment of this item would be to expense it, in the year incurred. The company has a tax rate of 30%. The company acquires 100% of shares in another company called Horizon for cash of £4.8 million. Net assets Horizon are £3.3m.There is an upward fair value adjustment of £0.4 m required to the acquirees’ net assets. The acquired company has a 0.2, in process development costs that have not been previously recognised but now meet the necessary capitalisation criteria. Explain how a company could acquire intangible assets. With regard to the development costs, what will be the implication for the financial statements of the two different approaches? Include any relevant ratios.
- The Klaven Corporation has operating income (EBIT) of $750,000. The company’s depreciation expense is $200,000. Klaven is 100 percent equity financed, and it faces a 40 percent tax rate. Assume that the firm has no amortization expense. What are its net income, its net cash flow, and its operating cash flow?Charter Enterprises currently has $1.5 million in total assets and is totally equity financed. It is contemplating a change in its capital structure. Compute the amount of debt and equity that would be outstanding if the firm were to shift to each of the following debt ratios: 10%, 20%, 30%, 40%, 50%, 60%, 90%. (Note: The amount of total assets would not change.) Is there a limit to the debt ratio's value?Cendana Berhad has made a profit of RM3 million last year. From those earnings, the company paid the dividend of RM2.00 on each of its 1,000,000 common shares outstanding. The capital structure of the company includes 30% debt, 20% preferred shares and 50% common shares. The corporate tax rate is 28%. The company wishes to venture into a new project and decided to use debt, preferred shares and common shares as sources of financing and still maintaining its current capital structure ratio. Based on the following information, calculate the weighted average cost of capital (WACC) of the company for taking the new project. You are required to calculate:i. The market price of its common share is RM12 and dividend are expected to grow at constant rate of 6% and flotation costs on its new common shares are RM1.50 per share.ii. The company can issue 3% dividend preferred shares at a market price of RM10 per share and flotation cost of RM1.00 per share.iii. The company can…
- Matbach Industries has $930,000 in current assets and $470,000 in fixed assets less $180,000 in accumulated depreciation. The firm’s current liabilities total $370,000, and the long-term liabilities $115,000. (a) What is the firm’s equity? (b) If the firm’s stock and capital surplus total $305,000, what is the value for retained earnings?The common stock and debt of XYZ Co. are valued $60 million and $40 million respectively. Currently cost of equity of the company is 18% and its cost of debt is 9%. If the company issues an additional $20 million of common stock and uses all of this cash to retire debt, what will be the new required rate of return on company’s equity? Assume change in leverage does not affect risk of debt and there are no taxes.Rian Corporation is currently working without using debt. The estimated operating profit per year is $16.065,180.00 while the equity capitalization rate (ke) is 18% pa. In the coming year, Rian is considering replacing some of his shares with a debt of $50 million, with an interest rate of 15% per annum. Question: a. Calculate the value of own capital capitalization (CS), the total capitalization value of the company (V), and the overall capitalization rate (ko) using the Net Income Approach. b. Calculate the amount of equity capitalized value, total capitalization value of the company, and overall capitalization rate using the traditional approach, if additional debt causes the equity capitalization rate (ke) to increase to 20%. c. Draw a graph of the two approaches.
- At the beginning of year 1, ABC Company raises $80 million of equity and uses the proceeds to buy a fixed asset. Operating profits before depreciation (all received in cash) are expected to be $50 million in year 1, $55 million in year 2, and $60 million in year 3. The firm pays out all operating profits as dividends and pays no taxes. At the end of year 3, the company terminates and has no remaining value. If the firm’s shareholders expect to earn a 10 percent return, what is the value of the firm’s equity using Discounted Dividend Approach?Organica Ltd. generates $350,000 cash flow each year. The cost of equity capital is 18% and the company has no debt outstanding. Organica would like to buy back $ 950,000 of its equity by borrowing the same amount at 12% per year. Assume that the debt will continue for an indefinite period and Modigliani and Miller proposition 1 holds, what is the cost of equity capital after the change in capital structure?An investment centre has earned an accounting profit of $135,000, after charging historical cost depreciation of $22,000 and increasing the provision for doubtful debts by $8,000 to $12,000. If the non‐current assets had been valued at replacement cost the depreciation charge would have been $41,000. The net book value of the investment centre’s net assets is $420,000 and the replacement cost is estimated to be $660,000. The organisation’s risk adjusted cost of capital is 14% but it has a large bank loan which incurs annual interest charges of 10%. Ignoring taxation, the economic value added (EVA) for the investment centre is: