Light Speed plc requires £2,000,000 to fund a new project. The firm expects to earn an EBIT of £250,000 p.a.in perpetuity. Assume the project does not affect the operating risk of the company. The company intends tofinance the project by issuing £1 million of 5% debentures at par and £1 million's worth of ordinary shares. Thecurrent capital structure of the company is as follows:MV (£'000)Debt (riskless)4,00016,000Required Return (%)5EquityThe corporation tax rate is 25%. There is no time lag between taxable flows and the tax payments or receiptsarising from those flows. Assume the required return on the market portfolio is 15% and the risk-free rate is 5%.Ignore income tax.15Required:Evaluate how the change of capital structure affects the company value and dividends. You should clearly specifyyour choice of gearing model and comment on how different models/assumptions made would/would not affect

The value of the company refers to the worth of the business that can be measured using the asset…

Debt (riskless) MV (£'000) 4,000 Required Return (%) 5 15 Equity 16,000 The corporation tax rate is 25%. There is no time lag between taxable flows and the tax payments or receipts arising from those flows. Assume the required return on the market portfolio is 15% and the risk-free rate is 5%. Ignore income tax. Required: Evaluate how the change of capital structure affects the company value and dividends. You should clearly specify your choice of gearing model and comment on how different models/assumptions made would/would not affect

Debt (riskless) MV (£'000) 4,000 Required Return (%) 5 15 Equity 16,000 The corporation tax rate is 25%. There is no time lag between taxable flows and the tax payments or receipts arising from those flows. Assume the required return on the market portfolio is 15% and the risk-free rate is 5%. Ignore income tax. Required: Evaluate how the change of capital structure affects the company value and dividends. You should clearly specify your choice of gearing model and comment on how different models/assumptions made would/would not affect

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter20: Financing With Derivatives

Section: Chapter Questions

Problem 7P

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Similar questions

Light Speed plc requires £2,000,000 to fund a new project. The firm expects to earn an EBIT of £250,000 p.a. in perpetuity. Assume the project does not affect the operating risk of the company. The company intends to finance the project by issuing £1 millions of 5% debentures at par and £1 million’s worth of ordinary shares. The current capital structure of the company is as follows: MV (£’000) Required Return (%) Debt (riskless) 4,000 5 Equity 16,000 15 The corporation tax rate is 25%. There is no time lag between taxable flows and the tax payments or receipts arising from those flows. Assume the required return on the market portfolio is 15% and the risk-free rate is 5%. Ignore income tax. Evaluate how the change of capital structure affects the company value and dividends.
Disturbed Corporation needs to raise $59 million to fund a new project. The company will sell shares at a price of $24.10 in a general cash offer and the company's underwriters will charge a spread of 7.5 percent. The direct flotation costs associated with the issue are $825,000 and the indirect costs are $485,000. How many shares need to be sold?
IMB has 1 million outstanding shares, currently trading at $10 each, and it is all-equity financed. Current earnings are $2 million, which also provide the company’s current cash holdings. At the next board meeting, the directors will be discussing whether to implement a new investment project, not yet known to the public. The project costs $1 million and it will generate expected earnings of $.5 million a year, in perpetuity starting one year from now. The appropriate discount rate for the project is 10%. If the project is not undertaken, the firm will pay a dividend of $2 a share. If the project is implemented, the firm must decide how to finance it. The board is considering two options: i) to finance the investment project by retaining earnings and paying only $1 dividend per share; ii) to keep the dividend at $2 per share, and to finance the project by issuing new equity. Shares are issued ex-dividend. Capital markets are perfect (no taxes).
Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and has no other assets or opportunities. Suppose the appropriate discount rate for Kohwe's future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is Kohwe's share price today? Suppose Kohwe borrows the $50 million instead. The finn will pay interest only on this loan each year, and maintain an outstanding balance of $40 million on the loan. Suppose that Kohwe's corporate tax rate is 35%, and expected free cash flows are still $9 million each year. c. What is Kohwe's share price today if the investment is financed with debt? Now suppose that with leverage, Kohwe's expected free cash flows wiH decline to $8 million per year due…
A company needs $35,943,750 to finance a major project in the company. The company expects that next year’s earnings from current operations and the additional earnings from the new project will be a total of $45,650,000. The company currently has 5,075,000 shares outstanding, with a price of $17.75 per share. The company’s management is assuming that any the additional shares issued to finance the project will not affect the market price of the company’s common stock. Calculate the following: If the $35,943,750 needed for the project is raised by selling new shares, what will the forecast for next year’s earnings per share (EPS) be? If the $35,943,750 needed for the project is raised by selling new shares, what will the firm’s price earnings ratio (PE ratio) be? If the $35,943,750 needed for the project is raised by issuing new debt, what will the forecast for next year’s earnings per share be? (Assume that there is no “tax shield effect” with issuing corporate debt.) If the…
Vanderley Industries Ltd is currently valued at $900 million. Management is planning to repurchase $400 million of its issued shares by issuing non-maturing debt at a 5 per cent annual interest rate. Vanderley Industries is subject to a 30 per cent tax rate. Given all of the Modigliani and Miller assumptions, except the assumption that there is no tax, what value will Vanderley Industries have after the capital restructure
M Ltd. belongs to a risk class for which the capitalization rate is 10%. It has 25,000outstanding shares and the current market price is Rs. 100. It expects a net profit of Rs.2,50,000 for the year and the Board is considering dividend of Rs. 5 per share. M Ltd.requires to raise Rs. 5,00,000 for an approved investment expenditure. Show, how theMM approach affects the value of M Ltd. if dividends are paid or not paid.
Bonakid Inc. has decided to invest P10,000,000 in a new headquarters and needs to determine the best way to finance the construction. The firm currently has P50,000,000 of 10% bonds and 4,000,000 common shares outstanding. The firm can obtain the P10,000,000 of financing through a 10% bond issue or the sale of 1,000,000 shares of common stock. The firm has a 40 percent tax rate. What is the financial breakeven point for Stock Issue plan?
AutoZone Tyre Ltd wants to expand its production capacity by investing R10 million in new plant and machinery for the manufacturing of its new brand of tyres. The management of AutoZone Tyre Ltd prefers to maintain the present 35% debt, 55% equity and 10% preference shares capital structure. The company expects to have a net income of R1,8 million and bases its dividend payments on the residual theory. Debt financing may be obtained at an after-tax cost of 15%. Ordinary shares, which are currently selling for R38 a share, may be issued with a flotation costs of 15%. The firm will pay a dividend (D1) of R1,20 per share in the coming financial year and had a growth rate of 5% over the past few years. It is expected that this growth rate will be maintained in future. The company is contemplating issuing 9% preference shares that are expected to sell for a par value of R72 per share. The cost of issuing and selling the shares is expected to be 5%. The tax rate is 29%. Calculate AutoZone…
AutoZone Tyre Ltd wants to expand its production capacity by investing R10 million in new plant and machinery for the manufacturing of its new brand of tyres. The management of AutoZone Tyre Ltd prefers to maintain the present 35% debt, 55% equity and 10% preference shares capital structure. The company expects to have a net income of R1,8 million and bases its dividend payments on the residual theory. Debt financing may be obtained at an after-tax cost of 15%. Ordinary shares, which are currently selling for R38 a share, may be issued with a flotation costs of 15%. The firm will pay a dividend (D1) of R1,20 per share in the coming financial year and had a growth rate of 5% over the past few years. It is expected that this growth rate will be maintained in future. The company is contemplating issuing 9% preference shares that are expected to sell for a par value of R72 per share. The cost of issuing and selling the shares is expected to be 5%. The tax rate is 29%. Calculate the…
Barry's Ltd. is all equity financed with 18,000 shares outstanding and each share sells for $22. The EBIT of the company is $50,000. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company?
Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 11.1%, $78,000 of preferred stock at a cost of 12.2%, and $880,000 of equity at a cost of 14.7%. The firm faces a tax rate of 25%. What will be the WACC for this project?