Cost of ordinary share capital

Assignment Help Corporate Finance
Reference no: EM13210906

Riphean plc and Silurian plc are two businesses operating in different industries from one another. They are both financed by a mixture of ordinary share and loan capital and both are seeking to derive the cost of capital for investment decision making purposes. The following information is available concerning the two businesses for the year to 30 November Year 8:

Riphean plc              Silurian plc

Profit for the year               £3.0m    £4.0m

Gross dividends  £1 .5m   £2.0m

Market value per ordinary share   £4.00     £1 .60

Number of ordinary shares              5m          1 0m

Gross interest yield on loan capital               8%          1 2%

Market value of loan capital            £1 0m    £1 6m

The annual growth rate in dividends is 5 per cent for Riphean plc and 8 per cent for Silurian plc.

Assume a 30 per cent tax rate.

Required:

(a) Calculate the weighted average cost of capital of Riphean plc and Silurian plc using the information provided.

(b) Discuss two possible reasons why the cost of ordinary share capital differs between the two businesses.

(c) Discuss two limitations of using the weighted average cost of capital when making invest- ment decisions.

Reference no: EM13210906

Questions Cloud

Define substances would be expected to be the most soluble : Which of the following substances would be expected to be the most soluble in CCl4? Answer with explanation as to why. a)NH3
Estimate the hourly so2 and particle emissions : what type of SO2 removal device before (in front of) or after (following) the particle collector would you use?
How far downstream would you establish barricades : The fire department proposes to approach the truck from the upstream side and heavily spray the truck with water to prevent an explosion. Will this help to reduce the chlorine concentration downstream?
What does line of collimation means : How to detect eror in line of collimation and what does line of collimation means.
Cost of ordinary share capital : Calculate the weighted average cost of capital of Riphean plc and Silurian plc using the information provided and discuss two possible reasons why the cost of ordinary share capital differs between the two businesses
Explain the change in total pressure within the chamber : What is the change in total pressure within the chamber following the reaction? Assume a constant temperature throughout the process.
Calculate the maximum bending stress : a round steel rod, 25 mm in diameter, subjected to a bending moment of 160 Nxm. calculate the maximum bending stress.
Influence on motivation than learned factors : Discuss whether or not innate factors have more of an influence on motivation than learned factors. Do you think that innate factors have more of an influence on motivation than learned factors?
Estimate the daily emissions of sulfur dioxide : Estimate the daily emissions of sulfur dioxide, nitrogen oxides as NO2, and particulate matter from an industrial steam-generating plant equipped with a dry-bottom pulvurized-coal firing system.

Reviews

Write a Review

 

Corporate Finance Questions & Answers

  Describe economic and other business environmental factors

Describe the economic and other business environmental factors that are likely to impact the availability of short term financing.

  Calculate the npv of project - straight-line method

Assuming that your cost of capital is 11% and that your tax rate is 35%, calculate the NPV of this project.

  Percentage change in monthly payment

Are either of the caps violated and what is the percentage change in monthly payment from year 1 to year 5?

  Distinguish between auditing and accounting

You will explore various sources to gather information about the auditing profession.

  Estimating the value of sales

Use the SUMIFS function to estimate the value of sales for every type of inventory for a prticular function. Please note that length of your different ranges must be identical.

  Calculate the expected portfolio return

What is the security market line, and how has it been used in practice to quantify the equity cost of capital faced by a company - calculate the expected portfolio return and the standard deviation of portfolio returns.

  Find the real gdp percent

Assume nominal GDP in 1999 was 100 billion dollar & in 2001 it was 270 billion dollar. The general price index in 1999 was 100 & in 2001, it was 150.

  Prepare a country risk analysis

Prepare a country risk analysis to evaluate if senior management at MNC should support the proposal for the company to enter the market in India with a major presence.

  The net present value criterion

A firm is considering to invest $75,000 in a personnel training program. The $75000 outlay will be charged off as an expense by the firm this year.

  Purpose the journal entry to record the issuance of the bond

Bond issue and Bond retirement Journal entries, Bond amortization Schedule using effective interest method - Purpose the journal entry to record the issuance of the bonds and the related bond issue costs incurred on January 1, 2005.

  What are the ethical issues in this case

Donald Lennon is the president, founder, and majority owner of Wichita Medical Corporation, an emerging medical technology products company.

  Explain what is yield that jane would earn

Explain what is the yield that Jane would earn by buying it at this price and holding it to maturity?

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!

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