The financial manager of Federal Financial leasing & investment Ltd has well-structured capital. The company has an 8% Debenture cost of Tk.100000 Tk., a 12% Preference Share cost of BDT 50000. Common Share BDT 120000 and Retained Earning BDT 30000. Other Information: a. The Common Shares of the company sell for TK. 30 each. b. The market price of preference share is Tk. 96 (par value Tk. 100). A flotation cost of 5% of th marketprice would be incurred for the issue of all kinds of share

The financial manager of Federal Financial leasing & investment Ltd has well-structured capital. The company has an 8% Debenture cost of Tk.100000 Tk., a 12% Preference Share cost of BDT 50000. Common Share BDT 120000 and Retained Earning BDT 30000. Other Information: a. The Common Shares of the company sell for TK. 30 each. b. The market price of preference share is Tk. 96 (par value Tk. 100). A flotation cost of 5% of th marketprice would be incurred for the issue of all kinds of share

Cornerstones of Financial Accounting

4th Edition

ISBN:9781337690881

Author:Jay Rich, Jeff Jones

Publisher:Jay Rich, Jeff Jones

Chapter12: Fainancial Statement Analysis

Section: Chapter Questions

Problem 99.4C

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ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per share of 0.75 out of annual earnings per share of 2.25. Currently, Rubenstein Bros.' stock is selling for 12.50 per share. Adhering to the company's target capital structure, the firm has 10 million in total invested capital, of which 40% is funded by debt. Assume that the firm's book value of equity equals its market value. In past years, the firm has earned a return on equity (ROE) of 18%, which is expected to continue this year and into the foreseeable future. a. Based on this information, what long-run growth rate can the firm be expected to maintain? (Hint: g = Retention rate ROE.) b. What is the stock's required return? c. If the firm changed its dividend policy and paid an annual dividend of 1.50 per share, financial analysts would predict that the change in policy will have no effect on the firm's stock price or ROE. Therefore, what must be the firms new expected long-run growth rate and required return? d. Suppose instead that the firm has decided to proceed with its original plan of dis bursing 0.75 per share to shareholders, but the firm intends to do so in the form of a stock dividend rather than a cash dividend. The firm will allot new shares based on the current stock price of 12.50. In other words, for every 12.50 in dividends due to shareholders, a share of stock will be issued. How large will the stock dividend be relative to the firm's current market capitalist ion? (Hint. Remember that market capitalization = P0 number of shares outstanding.) e. If the plan in part d is implemented, how many new shares of stock will be issued, and by how much will the companys earnings per share be diluted?
QUESTION 4 Madiba Ltd’s optimal capital structure calls for 35% debt and 65% equity. The after-tax cost of debt is 12%; its cost of ordinary shares funding from retained earnings is 14%; and its marginal tax rate is 28%. Madiba Ltd’s has the following investment opportunities: Supersonic: Cost = R 50 000; IRR = 11.90%. Telefunken: Cost = R100 000; IRR = 13.00% LG: Cost = R150 000; IRR = 14.50%. Sony: Cost = R200 000; IRR =15.70%. Madiba expects to have a net income of R250 000 and bases its dividend payment on the residual policy. How much would Madiba Ltd’s pay in dividends (after accepting all profitable projects) if it were to follows the residual theory of dividends?
QUESTION 4 Madiba Ltd’s optimal capital structure calls for 35% debt and 65% equity. The after-tax cost of debt is 12%; its cost of ordinary shares funding from retained earnings is 14%; and its marginal tax rate is 28%. Madiba Ltd’s has the following investment opportunities: Supersonic: Cost = R 50 000; IRR = 11.90%. Telefunken: Cost = R100 000; IRR = 13.00% LG: Cost = R150 000; IRR = 14.50%. Sony: Cost = R200 000; IRR =15.70%. Madiba expects to have a net income of R250 000 and bases its dividend payment on the residual policy. Which projects should the company choose given their calculated WACC and IRRs? Justify your answer.
CO A has cash flows of $0.76 per share, earnings of $1.25 per share and 115,000 shares outstanding. Co B. is a comparable public company with a price of $S60 per share, cash flows of $2.14 per share, and 510,000 shares outstanding. If CoBis a sufficiently comparable company, what do you estimate Co B. price per share to be? Assume: Risk free rate 4% Market risk premium 7% Cost of debt 4%, beta of debt is 0. Tax rate 23%