Give the 95% Confidence Interval for the Average Amount a Family Pays for a College Undergraduate
Question 31 a - Sample
The following statement of financial position data relates to Tufa Co, a company listed on a large stock market which pays corporation tax at a rate of 30%.
| $m | $m | |
|---|---|---|
| Equity and liabilities | ||
| Share capital | 17 | |
| Retained earnings | fifteen | |
| Total equity | 32 | |
| Not-electric current liabilities | ||
| Long-term borrowings | thirteen | |
| Current liabilities | 21 | |
| Total liabilities | 34 | |
| Total equity and liabilities | 66 |
The share upper-case letter of Tufa Co consists of $12m of ordinary shares and $5m of irredeemable preference shares.
The ordinary shares of Tufa Co have a nominal value of $0·50 per share, an ex dividend market cost of $seven·07 per share and a cum dividend market price of $7·52 per share. The dividend for 20X7 will be paid in the near future.
Dividends paid in recent years have been every bit follows:
| Year | 20X6 | 20X5 | 20X4 | 20X3 |
|---|---|---|---|---|
| Dividend ($/share) | 0·43 | 0·41 | 0·39 | 0·37 |
The v% preference shares of Tufa Co have a nominal value of $0·50 per share and an ex dividend market place price of $0·31 per share.
The long-term borrowings of Tufa Co consist of $10m of loan notes and a $3m bank loan. The depository financial institution loan has a variable interest charge per unit.
The 7% loan notes accept a nominal value of $100 per loan annotation and a market toll of $102·34 per loan note. Annual interest has just been paid and the loan notes are redeemable in four years' time at a 5% premium to nominal value.
Required:
(a) Calculate the later on-tax weighted average cost of capital of Tufa Co on a market value basis. (xi marks)
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Question 32 a - Specimen
DD Co has a dividend payout ratio of forty% and has maintained this payout ratio for several years. The current dividend per share of the company is $0·fifty per share and it expects that its adjacent dividend per share, payable in one year's time, volition be $0·52 per share.
The capital structure of the company is as follows:
| $m | $m | |
|---|---|---|
| Equity | ||
| Ordinary shares (nominal value $1 per share) | 25 | |
| Reserves | 35 | |
| 60 | ||
| Debt | ||
| Bond A (nominal value $100) | 20 | |
| Bail B (nominal value $100) | ten | |
| 30 | ||
| 90 |
Bond A will be redeemed at nominal in ten years' time and pays annual interest of 9%. The cost of debt of this bond is ix·83% per year. The electric current ex interest market price of the bond is $95·08.
Bond B volition be redeemed at nominal in four years' time and pays annual interest of eight%. The cost of debt of this bond is seven·82% per year. The electric current ex interest market toll of the bond is $102·01.
DD Co has a cost of equity of 12·4%. Ignore revenue enhancement.
Required:
(a) Calculate the following values for DD Co:
(i) ex dividend share price, using the dividend growth model; (iii marks)
(ii) capital gearing (debt divided by debt plus equity) using marketplace values; and (ii marks)
(iii) market value weighted average cost of capital. (ii marks)
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Question 4 a - Sample
Dinla Co has the following capital structure.
| Equity and reserves | $000 | $000 |
|---|---|---|
| Ordinary shares | 23,000 | |
| Reserves | 247,000 | 270,000 |
| Non-electric current liabilities | ||
| 5% Preference shares | 5,000 | |
| 6% Loan notes | 11,000 | |
| Banking concern loan | iii,000 | |
| nineteen,000 | ||
| 289,000 |
The ordinary shares of Dinla Co are currently trading at $4·26 per share on an ex dividend basis and have a nominal value of $0·25 per share. Ordinary dividends are expected to grow in the future by iv% per year and a dividend of $0·25 per share has just been paid.
The five% preference shares have an ex dividend marketplace value of $0·56 per share and a nominal value of $1·00 per share. These shares are irredeemable.
The 6% loan notes of Dinla Co are currently trading at $95·45 per loan annotation on an ex interest ground and will be redeemed at their nominal value of $100 per loan note in 5 years' time.
The bank loan has a fixed interest rate of seven% per yr.
Dinla Co pays corporation taxation at a charge per unit of 25%.
Required:
(a) Calculate the after-tax weighted average cost of capital of Dinla Co on a market place value basis. (8 marks)
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Question 4 b -
KQK Co wants to raise $20 1000000 in order to expand its business organisation and wishes to evaluate 1 possibility, which is an effect of viii% loan notes. Extracts from the financial statements of KQK Co are equally follows.
| $m | ||
|---|---|---|
| Income | 140·0 | |
| Cost of sales and other expenses | 112·0 | |
| Profit before involvement and tax | 28·0 | |
| Finance charges (interest) | 2·8 | |
| Profit before taxation | 25·2 | |
| Tax | vii·6 | |
| Profit after tax | 17·6 | |
| $m | $m | |
| Disinterestedness finance | ||
| Ordinary shares ($1 nominal) | 25·0 | |
| Reserves | 118·five | 143·5 |
| Non-electric current liabilities | 36·0 | |
| Electric current liabilities | 38·3 | |
| Total equity and liabilities | 217·8 |
Information technology is expected that investing $twenty one thousand thousand in the business will increase income by 5% over the starting time year. Approximately xl% of cost of sales and other expenses are fixed, the remainder of these costs are variable. Stock-still costs volition not exist affected by the business concern expansion, while variable costs will increment in line with income.
KQK Co pays corporation tax at a rate of thirty%. The company has a policy of paying out 40% of turn a profit after revenue enhancement as dividends to shareholders.
Current liabilities are expected to increment past iii% by the end of the offset year following the business concern expansion.
| Average values of other companies similar to KQK Co: | |
|---|---|
| Debt/equity ratio (volume value ground): | thirty% |
| Interest cover: | ten times |
| Operational gearing (contribution/PBIT): | 2 times |
| Return on disinterestedness: | 15% |
Required:
(b) Discuss the circumstances nether which the current weighted average cost of capital of a company could be used in investment appraisal and indicate briefly how its limitations every bit a discount rate could exist overcome. (5 marks)
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MC Question 19 -
On a market value basis, GFV Co is financed 70% by disinterestedness and 30% by debt. The company has an subsequently-tax cost of debt of half-dozen% and an equity beta of 1·2. The risk-free rate of return is 4% and the disinterestedness take chances premium is v%.
What is the afterwards-tax weighted average cost of majuscule of GFV Co?
A. five·4%
B. seven·2%
C. viii·3%
D. 8·viii%
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Question 5 a -
Tinep Co is planning to raise funds for an expansion of existing business concern activities and in preparation for this the visitor has decided to calculate its weighted average cost of capital. Tinep Co has the post-obit capital structure:
| $yard | $m | |
|---|---|---|
| Equity | ||
| Ordinary shares | 200 | |
| Reserves | 650 | |
| 850 | ||
| Non-current liabilities | ||
| Loan notes | 200 | |
| 1,050 |
The ordinary shares of Tinep Co have a nominal value of fifty cents per share and are currently trading on the stock market on an ex dividend ground at $five·85 per share. Tinep Co has an equity beta of 1·fifteen.
The loan notes have a nominal value of $100 and are currently trading on the stock marketplace on an ex interest ground at $103·50 per loan annotation. The involvement on the loan notes is half dozen% per year before tax and they will exist redeemed in six years' fourth dimension at a 6% premium to their nominal value.
The risk-free charge per unit of return is 4% per year and the equity run a risk premium is vi% per year. Tinep Co pays corporation tax at an annual charge per unit of 25% per year.
Required:
(a) Calculate the market value weighted average toll of capital and the book value weighted average cost of capital of Tinep Co, and comment briefly on any divergence between the 2 values. (9 marks)
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Question five a iii - Specimen
DD Co has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the visitor is 50c per share and information technology expects that its next dividend per share, payable in one year's time, will exist 52c per share.
The capital structure of the company is as follows:
| $chiliad | $yard | |
|---|---|---|
| Equity | ||
| Ordinary shares (par value $one per share) | 25 | |
| Reserves | 35 | |
| 60 | ||
| Debt | ||
| Bail A (par value $100) | 20 | |
| Bond B (par value $100) | 10 | |
| 30 | ||
| 90 |
Bond A will be redeemed at par in x years' time and pays annual involvement of 9%. The price of debt of this bond is 9·83% per year. The electric current ex involvement market price of the bond is $95·08.
Bail B will be redeemed at par in 4 years' time and pays almanac interest of 8%. The cost of debt of this bail is 7·82% per year. The current ex interest market price of the bond is $102·01.
DD Co has a toll of equity of 12·4%. Ignore taxation.
Required:
(a) Calculate the post-obit values for DD Co:
(iii) market value weighted average cost of majuscule. (2 marks)
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Question 3 a -
The equity beta of Contend Co is 0•ix and the company has issued ten one thousand thousand ordinary shares. The market value of each ordinary share is $7•50. The visitor is likewise financed past vii% bonds with a nominal value of $100 per bond, which will be redeemed in seven years' time at nominal value. The bonds have a full nominal value of $fourteen million. Interest on the bonds has but been paid and the current market value of each bail is $107•14.
Fence Co plans to invest in a project which is unlike to its existing business operations and has identified a company in the aforementioned business area as the project, Hex Co. The equity beta of Hex Co is 1•two and the company has an equity market value of $54 one thousand thousand. The market value of the debt of Hex Co is $12 one thousand thousand.
The risk-gratis rate of return is 4% per year and the average return on the stock market is xi% per year. Both companies pay corporation tax at a rate of 20% per year.
Required:
(a) Calculate the current weighted boilerplate price of capital of Fence Co. (7 marks)
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Question ii c -
Card Co has in issue 8 million shares with an ex dividend market value of $vii·16 per share. A dividend of 62 cents per share for 2013 has just been paid. The design of recent dividends is as follows:
| Year | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|
| Dividends per share (cents) | 55.1 | 57.ix | 59.ane | 62.0 |
Card Co also has in issue 8•5% bonds redeemable in v years' time with a total nominal value of $five million. The market value of each $100 bond is $103•42. Redemption volition exist at nominal value.
Card Co is planning to invest a significant amount of coin into a joint venture in a new business expanse. It has identified a proxy company with a similar business risk to the joint venture. The proxy company has an equity beta of 1•038 and is financed 75% by equity and 25% by debt, on a market value footing.
The current gamble-free rate of return is 4% and the average equity take a chance premium is 5%. Card Co pays turn a profit revenue enhancement at a rate of 30% per year and has an equity beta of 1•6.
Required:
Calculate the weighted average after-tax price of upper-case letter of Carte Co using a cost of equity of 12%.
(5 marks)
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Question 2 a -
AMH Co wishes to calculate its current cost of capital letter for use as a discount rate in investment appraisal. The following financial information relates to AMH Co:
The ordinary shares of AMH Co have an ex div market value of $4·70 per share and an ordinary dividend of 36·3 cents per share has just been paid. Celebrated dividend payments have been as follows:
The preference shares of AMH Co are not redeemable and have an ex div marketplace value of 40 cents per share. The 7% bonds are redeemable at a five% premium to their nominal value of $100 per bail and have an ex involvement market value of $104·50 per bond. The bank loan has a variable interest charge per unit that has averaged 4% per twelvemonth in contempo years.
AMH Co pays profit tax at an almanac charge per unit of 30% per year.
Required:
Calculate the market value weighted average cost of capital of AMH Co.
(12 marks)
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Question iii a, b -
The argument of financial position of BKB Co provides the post-obit information:
| $m | $thou | |
| equity finance | ||
| ordinary shares ($i nominal value) | 25 | |
| reserves | 15 | 40 |
| ---- | ||
| non-current liabilities | ||
| seven% convertible bonds ($100 nominal value) | 20 | |
| 5% preference shares ($i nominal value) | 10 | 30 |
| ---- | ||
| electric current liabilities | ||
| trade payables | 10 | |
| overdraft | xv | 25 |
| ---- | ---- | |
| total liabilities | 95 | |
| ---- |
BKB Co has an equity beta of 1·2 and the ex-dividend market place value of the company's disinterestedness is $125 one thousand thousand. The ex-interest market value of the convertible bonds is $21 one thousand thousand and the ex-dividend market value of the preference shares is $6·25 million.
The convertible bonds of BKB Co have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the aforementioned date in five years' fourth dimension. The current ordinary share cost of BKB Co is expected to increase by 4% per year for the foreseeable hereafter.
The overdraft has a variable interest charge per unit which is currently half-dozen% per year and BKB Co expects this to increase in the near future. The overdraft has non inverse in size over the terminal fiscal yr, although ane twelvemonth ago the overdraft interest rate was iv% per twelvemonth. The company's bank will not permit the overdraft to increment from its electric current level.
The equity adventure premium is 5% per year and the risk-costless rate of render is iv% per year. BKB Co pays profit tax at an almanac rate of xxx% per twelvemonth.
Required:
(a) Calculate the market value after-taxation weighted average cost of majuscule of BKB Co, explaining clearly whatever assumptions you brand.
(b) Hash out why market value weighted boilerplate cost of majuscule is preferred to book value weighted average price of capital when making investment decisions.
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Question 4 c -
Corhig Co is a visitor that is listed on a major stock exchange. The company has struggled to maintain profitability in the last two years due to poor economic weather in its home country and as a effect it has decided non to pay a dividend in the electric current year. However, there are at present articulate signs of economic recovery and Corhig Co is optimistic that payment of dividends tin be resumed in the future. Forecast fiscal information relating to the company is as follows:
| year | 1 | 2 | 3 |
| earnings ($000) | 3000 | 3600 | 4300 |
| dividends ($000) | zip | 500 | 1000 |
The company is optimistic that earnings and dividends will increase subsequently Yr iii at a constant almanac charge per unit of three% per year.
Corhig Co currently has a before-tax toll of debt of 5% per year and an equity beta of 1•6. On a marketplace value basis, the company is currently financed 75% by disinterestedness and 25% past debt.
During the class of the final two years the company acted to reduce its gearing and was able to redeem a large corporeality of debt. Since there are now articulate signs of economic recovery, Corhig Co plans to heighten further debt in lodge to modernise some of its non-electric current assets and to support the expected growth in earnings.
This additional debt would mean that the capital structure of the company would alter and information technology would be financed 60% by equity and 40% by debt on a market value footing. The before-tax price of debt of Corhig Co would increase to vi% per year and the equity beta of Corhig Co would increase to 2.
The risk-free rate of return is 4% per yr and the equity risk premium is five% per year. In social club to stimulate economic activity the government has reduced turn a profit tax rate for all large companies to 20% per year.
The electric current average toll/earnings ratio of listed companies similar to Corhig Co is 5 times.
Required:
Summate the current weighted average after-revenue enhancement price of capital of Corhig Co and the weighted average after-taxation cost of upper-case letter following the new debt issue, and comment on the deviation between the 2 values.
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Question 3 c -
Contempo fiscal data relating to Close Co, a stock market listed company, is as follows.
| $g | ||
| profit after tax (earnings) | 66.6 | |
| dividends | 40.0 | |
| argument of financial position information | ||
| $m | $g | |
| non current assets | 595 | |
| current assets | 125 | |
| ------- | ||
| total assets | 720 | |
| ------- | ||
| current liabilities | 70 | |
| equity | ||
| ordinary shares ($i nominal) | 80 | |
| reserves | 410 | |
| ------- | ||
| 490 | ||
| not current liabilities | ||
| 6% bank loan | xl | |
| 8% bonds ($100 nominal) | 120 | |
| ------- | ||
| 160 | ||
| ------- | ||
| 720 | ||
| ------- |
Financial analysts have forecast that the dividends of Close Co will abound in the future at a rate of four% per year. This is slightly less than the forecast growth rate of the profit subsequently tax (earnings) of the visitor, which is v% per year.
The finance managing director of Close Co thinks that, because the risk associated with expected earnings growth, an earnings yield of 11% per year tin be used for valuation purposes.
Close Co has a toll of equity of 10% per yr and a earlier-revenue enhancement cost of debt of 7% per year. The 8% bonds volition exist redeemed at nominal value in 6 years' time. Shut Co pays tax at an almanac rate of thirty% per year and the ex-dividend share price of the company is $8·50 per share.
Required:
Summate the weighted average after-taxation cost of capital of Shut Co using marketplace values where advisable.
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