QUESTION 3 Bingo Traders uses a combination of shares and debt in their capital structure. The details are given below: There are 8 000 000 R5 ordinary shares in issue and the current market price is R7.70 per share. The latest dividend paid was 89 cents and a 11% average growth for the past eight years was maintained. The company has 4 400 000 R5, 10% preference shares with a market price of R6 per share. Bingo Traders has a public traded debt with a face value of R14 000 000. The coupon rate of the debenture is 10% and the current yield to maturity of 13%. The debenture has 6 years to maturity. They also have a bank overdraft of R6 000 000 due in 3 years' time and interest is charged at 15% per annum. Additional Information: • Bingo Traders has a beta of 1.6, a risk-free rate of 7.1% and a return on the market of 17.7%. • Company tax rate is 30%. Required: 3.1 Calculate the weighted average cost of capital, using the Capital Asset Pricing Model to calculate the cost of equity. 3.2 Calculate the cost of equity, using the Gordon Growth Model.

QUESTION 3 Bingo Traders uses a combination of shares and debt in their capital structure. The details are given below: There are 8 000 000 R5 ordinary shares in issue and the current market price is R7.70 per share. The latest dividend paid was 89 cents and a 11% average growth for the past eight years was maintained. The company has 4 400 000 R5, 10% preference shares with a market price of R6 per share. Bingo Traders has a public traded debt with a face value of R14 000 000. The coupon rate of the debenture is 10% and the current yield to maturity of 13%. The debenture has 6 years to maturity. They also have a bank overdraft of R6 000 000 due in 3 years' time and interest is charged at 15% per annum. Additional Information: • Bingo Traders has a beta of 1.6, a risk-free rate of 7.1% and a return on the market of 17.7%. • Company tax rate is 30%. Required: 3.1 Calculate the weighted average cost of capital, using the Capital Asset Pricing Model to calculate the cost of equity. 3.2 Calculate the cost of equity, using the Gordon Growth Model.

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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A company has the following book value in capital structure:GHSMEquity capital (in shares of GHS 10 each, fully paid-up at par)1511% Preference capital (in shares of GHS 100 each, fully paid-up at par)1Retained earnings 2013.5% Debentures (of GHS 100 each)1015% Term Loans12.5The next year expected dividend on equity shares is GHS 3.60 per share and the dividend per share is expected to grow at 7% into the foreseeable future. The market price per share is GHS 40. Preference stock, redeemable after 10 years is currently selling at GHS 75 per share. Debentures, redeemable after six years, are selling at GHS 80 per debenture. The income-tax rate for the company is 40%Required Calculate the weighted average cost of capital of raising new capital.
QUESTION 4B (5 marks): Magnum Ltd has the following capital structure:Ordinary Equity: 68 000 ordinary shares outstanding at a market price of $35 per share. Theshares have just paid a $1.85 annual dividend and have a dividend growth rate of 2.5%.Preference Equity: There are 15 000 preference shares with an 8% dividend rate, outstanding ata market price of $75 a share. The preference shares have a par value of $100.Debts: The outstanding bonds mature in 20 years, have a total face value of $850 000, a facevalue per bond of $1000 and a market price of $1196.4 each. The bonds have before tax YTM8%. The marginal tax rate of the firm is 35%. Required:a) Calculate the current market value (rounded off to the nearest whole number). (2 marks) b) Calculate the capital structure of the company. Identify the total weights of equityfunding (rounded off to two decimal places) (1 mark) c) Compute the weighted average cost of capital (WACC) under the traditional tax systemfor the company, using…
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A company has the following information in its statement of financial position. Ghs'm Ordinary shares of Ghs5 250 12% unsecured bonds 100 The ordinary shares are currently quoted at Ghs 13 each and the bonds are trading at Ghs720 per Ghs1,000 nominal. The ordinary dividend of Ghs 1.50 has just been paid with an expected growth rate of 10%. Assume corporation tax is currently 16.5%. Calculate the WACC for this company
Problem 2: (Paid-In Capital is also called Share Premium) Shown below are account balances found in the ledger of Emerald Green Corporation at the end of 2014: 720,000 364,000 Subscription Receivable- Preference Shares Subscription Receivable- Ordinary Share 10% Preference Share Capital, P50 par value, authorized, 100,000 shares P 2,880,000 1,440,000 Issued Subscribed 4,320,000 Ordinary Share Capital, no par, P10 stated value, authorized, 300,000 shares Issued Subscribed P 2,720,000 560,000 3,280,000 Paid-In Capital in Excess of Par or Stated Value Préference share Ordinary share 432,000 656,000 P. 1,088,000 Instructions: Compute for each of the item shown below. Present supporting computation in good form in a separate work sheet. 1. Number of preference share issued. 2. Number of ordinary shares issued. 3. Number of preference shares subscribed. 4. Number of ordinary shares subscribed. Average price per share received by the corporation on its preference share capital including…
Question 1 The following information relates to a company listed on Luse- Mungwi PLC ZMK Issued share capital (1000 shares) Share premium. Reserves. Share holders funds. 6% Irredeemable Debentures. 9% Redeemable Debentures. Bank loan. Total Long Term Liabilities. Million 4 000 2 600 290 6,890 2,800 2,900 1 000 6 700 The current cum interest market value per k100 units is k103 and k105 fir the 6% and 9% Debentures respectively. The 9% Debenture is redeemable at par in 10 years time. The bank loan bears interest rate of 2% above the base rate (current base rate is 15%). The current ex-div market price of shares is k1, 100 and a dividend of K100 per share which is expected to grow at a rate of 5% per year has just been paid. The effective corporation tax rate for Mungwi is 30%. Required: A) Calculate the effective after tax weighted Average Cost of Capital (WACC) fir Mungwi PLC
An entity has the following information in its statement of financial position. Ordinary shares of 50c $2 500 000 12% unsecured bonds $1 000 000 The ordinary shares are currently quoted at 130c each and the bonds are trading at $72 per $100 nominal.The ordinary dividend of 15c has just been paid with an expected growth rate of 10%. Corporation tax is currently 30%. Calculate the weighted average cost of capital for this entity
The Capital Structure of GM Ltd is as follows: Kshs. Million Ordinary Shares 50 Preference Shares 50 Debt 10 Bank Overdraft 10 Retained Earnings 80 Total Capital 200 Additional Information (a) The GM Ordinary Shares are currently trading in the Nairobi Security Exchange at Kshs.30 per share and pays dividend on semiannually basis at Kshs.0.30 per share. This dividend is expected to increase by 5% per year. (b) The SPV 8% Preference Shares are currently trading at Kshs.48 per share with a Par Value of Kshs.50 (c) The Debt in the Menu of Finance (Capital Structure) is charged interest of Kshs. 1 million per annum. (d) The Bank Overdraft is charged interest of Kshs. 1 million per annum. (e) The Cost of Retained Earnings is the same as…
Give typing answer with explanation and conclusion Devon Ltd.'s common stock is trading at $40 and has an estimated price to earnings (P/E) ratio of 32. price to earnings (P/E) ratio is estimated at 32. If Devon borrows funds to repurchase shares at its after-tax cost of debt of 5%, it is likely that its earnings per share will be If Devon borrows funds to repurchase shares at its after-tax cost of debt of 5%, it is likely that its earnings per share will: Options for Question : A. increase. B. decrease. C. stay the same.
a Des 2. MV Corporation has debt with market value of $100 million, common equity with a book value of $100 million, and preferred stock worth $20 million outstanding. Its common equity trades at $50 per share, and the firm has 6.0 million shares outstanding. What weights should MV Corporation use in its WACC? The debt weight for the WACC calculation is %. (Round to two decimal places.) The preferred stock weight for the WACC calculation is decimal places.) %. (Round to two The common equity weight for the WACC calculation is decimal places.) %. (Round to two
1. You are required to calculate the Weighted Average Cost of Capital (WACC) of Sethoo & Sons Limited from the data below: Black Limited Star Limited Number of Ordinary Shares (GH¢1.00) 2,000,000 1,000,000 Net Income available to Ordinary Shares 600,000 250,000 Gross Dividend 500,000 200,000 Market Price per share 3.00 2.00 Market value of Debts 3,000,000 1,500,000 Annual Growth rate of Dividend 12% 10% Gross Interest yield 10% 11% NOTE: The corporation tax rate is 50%. Debts are currently quoted at GH¢100 per block. 2. Explain why the Market Value Approach of calculating WACC is preferred to the Book Value Approach. 3. What are the uses of Weighted Average Cost of Capital?
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