A company has share capital of Kshs 20 million and is planning to invest an additional fund of KShs 16,000,000 towards its expansion programme. Suggest the best option from the following, from a tax point of view: 1. To issue share capital of Kshs 16,000,000. 2. To borrow Kshs 4,000,000 @ 18% pa and to issue debentures of Kshs 4,000,000 @ 11% pa and the balance amount be collected by issuing shares in the public. 3. To issue debentures for Kshs 10,000,000 @ 11% pa and the balance be collected by issuing shares in the public. 4. Rate of return is 30% before paying any interest and tax. 20%
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- Krishna Enterprises Ltd is considering different methods to finance its expansion proposal. Estimated funds required are ₹ 60,00,000. Two alternative methods are available for raising the funds:I To raise ₹ 60,00,000 by issuing Equity Shares of ₹100 each ,II To raise ₹ 25,00,000 by issuing Equity Shares of ₹ 100 each and ₹ 35,00,000 through Term Loan @ 10% interest per annum.The existing capital structure of the company consists of 20,000 equity shares of ₹ 100 each and the expected EBIT (Earnings before interest and tax) is ₹ 11,40,000. Corporate tax rate is 25%, Advise the company on the basis of EPS in each alternative.Cybernauts, Ltd., is a new firm that wishes to determine an appropriate capital structure. It can issue 16 percent debt or 15 percent preferred stock. The total capitalization of the company will be $5 million, and common stock can be sold at $20 per share. The company is expected to have a 50 percent tax rate (federal plus state). Four possible capital structures being considered are as follows: PLAN DEBT PREFERRED EQUITY 1 0% 0% 100% 2 30 0 70 3 50 0 50 4 50 20 30 a. Construct an EBIT - EPS chart for the four plans. (EBIT is expected to be $1 million.) Be sure to identify the relevant indifference points and determine the horizontal - axis intercepts. b. Which plan is best? Why?1) Assume a VC firm raised $6B in committed capital for a 10-year investment fund. Each year, 2% of the committed capital will go to management fees, or 20% total. The remaining 80%, or $4.8B, will be invested in start-up firms. The firm also charges 20% carried interest on the profits of the fund. Assume the fund is worth $77.6B at the end of 10 years. What is the annual IRR based on the $6B initial investment? This is what the investors earned, after expenses. Note that you must take out the carried interest to find out the amount that goes to the investors. 2) A firm needs to raise $474.2 million in its IPO to fund its next investment project. The flotation costs (aka underwriting fees) are equal to 7%. How much does the firm need to raise so that they are left with the amount they need after flotation costs? 3) Determine how many new shares of stock would need to be sold in an IPO with the following characteristics: Pre-IPO valuation: $2 billion Number of existing shares…
- The company requires P1,000,000 for its proposed plan. The following financial alternatives are available:● Plan I: 100% Equity Capital (Face Value P100)● Plan II: 50% Equity Capital (Face Value P100) and 50% Debenture (interest rate 6%)● Plan III: 50% Equity Capital (Face Value P100) and 50% Preference Shares (rate of dividend 6%)● Plan IV: 25% Equity Capital (Face Value $100), 25% Debentures (interest rate 6%), and 50% Preference Shares (rate of dividend 6%) The rate of tax applicable to the company is 50%. The company expects an EBIT of P4,000,000. Calculate the indifference point of EBIT between Plan I and Plan III. Plan I: There is no fixed financial charge (debenture interest or preference dividend). Therefore, there is no financial break-even. Plan II: Fixed financial charges amount to P30,000 (interest on debentures). Therefore, the financial break-even is P30,000.Plan III: In the case of Plan III, the fixed financial charge is P30,000 (preference dividend).…The company requires P1,000,000 for its proposed plan. The following financial alternatives are available:● Plan I: 100% Equity Capital (Face Value P100)● Plan II: 50% Equity Capital (Face Value P100) and 50% Debenture (interest rate 6%)● Plan III: 50% Equity Capital (Face Value P100) and 50% Preference Shares (rate of dividend 6%)● Plan IV: 25% Equity Capital (Face Value $100), 25% Debentures (interest rate 6%), and 50% Preference Shares (rate of dividend 6%)The rate of tax applicable to the company is 50%. The company expects an EBIT of P4,000,000. Calculate the indifference point of EBIT between Plan I and Plan III.Plan I: There is no fixed financial charge (debenture interest or preference dividend). Therefore, there is no financial break-even.Plan II: Fixed financial charges amount to P30,000 (interest on debentures). Therefore, the financial break-even is P30,000.Plan III: In the case of Plan III, the fixed financial charge is P30,000 (preference dividend).…Food and Health Company is expanding and has an average-risk project under consideration. The company decides to fund the project in the same manner as the company’s existing capital structure. The cost of debt is 9.00%, the cost of preferred stock is 12.00%, the cost of common stock is 16.00%, and the WACC adjusted for taxes is 11.50%. Incremental cash flows: Category T0 T1 T2 T3 Investment -$2,500,000 NWC -$250,000 $250,000 Operating Cash Flow $750,000 $750,000 $750,000 Salvage $50,000 If the internal rate of return (IRR) of the project is estimated to be 11%, according to the IRR decision making rule, should this project be accepted? Why or why not?
- Food and Health Company is expanding and has an average-risk project under consideration. The company decides to fund the project in the same manner as the company’s existing capital structure. The cost of debt is 9.00%, the cost of preferred stock is 12.00%, the cost of common stock is 16.00%, and the WACC adjusted for taxes is 11.50%. Incremental cash flows: Category T0 T1 T2 T3 Investment -$2,500,000 NWC -$250,000 $250,000 Operating Cash Flow $750,000 $750,000 $750,000 Salvage $50,000 Given the expected incremental cash flows provided in this question what is the net present value (NPV) of this project? Show all steps, workings, and formula(s) clearly.The Elkmont Corporation needs to raise $63.8 million to finance its expansion into new markets. The company will sell new shares of equity via a general cash offering to raise the needed funds. The offer price is $22 per share and the company’s underwriters charge a spread of 7.5 percent, how many shares need to be sold?A company wants to raise 2 crorefrom different sources. The EBIT of the firm is Rs. 80,00,000. There are three alternative plans available for the firm. Plan A:Raise the fund entirely through equity shares of Rs. 100 each.Plan B:50% amount through issue of 8% debentures & 50% by equity at Rs 50/share Plan C:25% amount through issue of 13% preference shares, 30% amount by issue of 9% debentures and remaining amount by equity at Rs 90 each.The tax rate is 30%. If the objective of the company is to maximize EPS, which is the best alternative? (solve using excel)
- The financial manager of a company has formulated various financial plans to finance Rs. 30,00,000 required to implement various capital budgeting projects. You are required to determine the indifference point for each plan, assuming 55 % corporate tax rate and the face value of equity shares Rs. 100 AND also show verification table. a) Either equity capital of Rs. 30,00,000 OR 12 % Preference share capital of Rs. 10,00,000, 10 % Debentures and Rs. 10,00,000 equities. b) Either equity share capital of Rs. 20,00,000(Fully paid) and 10 % Debentures of Rs. 10,00,000 OR 12 % preference share capital of Rs. 10,00,000, 10 % Debentures of Rs. 8,00,000 and Rs. 12,00,000 by issuing equity shares (Fully paid).Question is Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company’s tax rate is 30%. Component Scenario 1 Scenario 2 Cost of Capital Tax Rate Debt $4,000,000.00 $1,000,000.00 8% 30% Preferred Stock 1,200,000.00 1,500,000.00 10% Common Stock 1,000,000.00 3,700,000.00 13% Total $6,200,000.00 $6,200,000.00 1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).) Senario 1 weight % Senario 2 Weight% Senario 1 Weighted Cost Senario 2 weight cost Cost of capital Tax Rate Debt 64.52 16.13…Peter Johnson, the CFO of Homer Industries, Inc is trying to determine the Weighted Cost of Capital (WACC) based on two different capital structures under consideration to fund a new project. Assume the company’s tax rate is 30%. Component Scenario 1 Scenario 2 Cost of Capital Tax Rate Debt $5,000,000.00 $2,000,000.00 8% 30% Preferred Stock 1,200,000.00 2,200,000.00 10% Common Stock 1,800,000.00 3,800,000.00 13% Total $8,000,000.00 $8,000,000.00 1-a. Complete the table below to determine the WACC for each of the two capital structure scenarios. (Enter your answer as a whole percentage rounded to 2 decimal places (e.g. .3555 should be entered as 35.55).) Scenario 1 weight % Scenario 2 weight % Scenario1 weighted cost Scenario 2 weighted cost cost of capital tax rate Dept ? ? ? ? 8% 30% Preferred stock ? ? ? ? 10% Common stock ? ? ? ? 13% Total ? ? ? ? 1-b. Which capital structure shall Mr. Johnson choose to fund the new project?…
