User Account

All Pages

Calculate the market value weighted average cost of capital

Assignment Help Financial Accounting
Reference no: EM13865368

Question one

Burse Co wishes to calculate its weighted average cost of capital and the following information relates to the companyat the current time:

Number of ordinary shares                          20 million

Book value of 7% convertible debt                $29 million

Book value of 8% bank loan                         $2 million

Market price of ordinary shares                    $0·50 per share

Market value of convertible debt                  $107·11 per $100 bond

Equity beta of Burse Co                              1·2

Risk-free rate of return                               4·7%

Equity risk premium                                    6·5%

Rate of taxation                                        30%

Burse Co expects share prices to rise in the future at an average rate of 6% per year. The convertible debt can be redeemed at par in eight years' time, or converted in six years' time into 15 shares of Burse Co per $100 bond.

Required:

(a) Calculate the market value weighted average cost of capital of Burse Co. State clearly any assumptions that you make.

Question two

The table below shows earnings and dividends for XYZ Inc over the past five years.

Net earnings

Net dividend

Year

per share

per share

$

$

20W9

1.40

0.84

20X0

1.35

0.88

20X1

1.35

0.90

20X2

1.30

0.95

20X3

1.25

1.00

There are 10,000,000 shares issued and the majority of these shares are owned by private investors. There is no debt in the capital structure.

It is clear from the table that the company has experienced difficult trading conditions over the past few years. In the current year, net earnings are likely to be $10 million, which will be just sufficient to pay a maintained dividend of $1 per share.

Members of the board are considering a number of strategies for the company, some of which will have an impact on the company's future dividend policy.

The company's shareholders require a return of 15% on their investment.

Four options a.e being considered, as follows.

(1) Pay out all earnings as dividends

(2) Pay a reduced dividend of 50% of earnings and retain the remaining 50% for future investment

(3) Pay a reduced dividend of 25% of earnings and retain the remaining 75% for future investment

(4) Retain all earnings for an aggressive expansion programme and pay no dividend at all

The directors cannot agree on any of the four options discussed so far. Some of them prefer option (1) because they believe to do anything else would have an adverse impact on the share price. Others favour either option (2) or option (3) because the company has identified some good investment opportunities and they believe one of these options would be in the best long-term interests of shareholders. An adventurous minority favours option (4) and thinks this will allow the company to take over a small competitor.

Required

(a) Discuss the company's dividend policy between 20W9 and 20X3 and its possible consequences for earnings.

(b) Advise the directors of the share price for XYZ Inc which might be expected immediately following the announcement of their decision if they pursued each of the four options, using an appropriate valuation model.

Reference no: EM13865368

Questions Cloud

Use of sensitive information that occur at organization : Develop the following information for three different ethical situations related to the use of sensitive information that could occur at the organization: The specific users and parties involved
Strategic planning and management : Strategic Planning and Management- identify some of the strengths, weaknesses, opportunities, and threats to the organization as it considers its future business goals
Relay protection systems for electrical power networks : An investigation in different Relay Protection systems for Electrical power networks (Grid level).
What type of weather is in store for miami : Do you think Tampa will clear within the next 12 hours? Explain your answer. What type of weather is in store for Miami within the next 12 hours? Explain your answer
Calculate the market value weighted average cost of capital : Discuss the companys dividend policy between 20W9 and 20X3 and its possible consequences for earnings - Advise the directors of the share price for XYZ Inc which might be expected immediately following the announcement of their decision if they pur..
Design a graphic of the epidemiological triangle : In this Assignment, you design a graphic of both the epidemiological triangle and the chain of infection for an infectious disease of your choice. Additionally, you write a detailed description for each of your graphics, explaining the components ..
What print methods might you consider for first smaller runs : What print methods might you consider for the first smaller runs? Would you change to a different method if the product does well and goes into larger production runs? Justify your reasoning and considerations.
Whether land improvements are eligible for cost recovery : Would your answer in (a) change if the amounts involved are reversed (i.e. the trip home cost $490; staying in Jackson would have been $550)? Explain.
Acc 421 - federal income taxation : ACC 421 - Federal Income Taxation. Determine Lori's total deduction if the §179 expense is first taken with respect to the five-year class asset.

Reviews

Write a Review

Financial Accounting Questions & Answers

  The discount partnership is being liquidated

The Discount Partnership is being liquidated. Prepare a schedule of partnership liquidation for each of the following three independent cases. The noncash assets are sold for $60,000, and any partner with a deficit is unable to eliminate any of the d..

  Calculate the difference between cash flow

Calculate the difference between cash flow from operations and net income for each company for 2009 and 2010

  Prepare the statement of financial position

Prepare the statement of financial position, statement of profit or loss and other comprehensive income and statement of changes in equity of Amanah Ltd for the year ended 31 December 2013 in accordance with the requirements of AASB101.

  Gain access to a document needed to support a transaction

Imagine that you were a preparer of a client's return and are unable to gain access to a document needed to support a transaction. You had asked the client numerous times for this item and you were finally presented with an email from the CEO stating..

  Question a company produces various products it uses the

question a company produces various products. it uses the job order costing system and allocates variable overhead on

  Summary journal entry to record raw materials used

In January, Knox Company requisitions raw materials for production as follows: Job 1 $900.00, Job 2 $1400.00, Job 3 $700.00, and general factory use $600. Prepare a summary journal entry to record raw materials used.

  Compute cost of goods manufactured

Compute cost of goods manufactured - prepare an income statement through gross profit and show the presentation of the ending inventories on the December 31, 2012, balance sheet.

  Depreciation for the manufacturing plant

AP constructed a new manufacturing plant for a total cost of $7,615,000 and placed it in service on March 2. To finance the construction, AP took out a $6 million, 30-year mortgage on the property. Compute AP’s MACRS depreciation for the manufacturin..

  Advise the board of cemer holdings

Advise the Board of Cemer Holdings Ltd about which of the two options would result in Cemer Holdings Ltd receiving the greater cash proceeds on disposal of its investment in Properties

  Problem 1 balance sheetsdecember 31 20x3nbspgreen

problem 1 balance sheetsdecember 31 20x3nbspgreen towerltd.blue loftltd.assetsnbspnbspcurrent assetsnbspnbspnbspnbsp

  Capitalization include imputed amount for interest on equity

Should interest capitalization include an imputed amount for interest on equity if the project is not fully financed by debt?

  Identify five important guidelines for drawing a flowchart

Identify five important guidelines for drawing a flowchart. Select one from your list and describe why it could be the most important one to consider when preparing a flowchart. (Hint: You may want to support your argument with an example.)

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd