Determine the after-tax cost of debt

Assignment Help Financial Accounting

Reference no: EM131266476

Question 1: A firm's legal capital is defined as the par value of its common stock. The following table represents a scaled version of the equity account of FIRM XYZ:

Common stock at par R - 136586

Paid-in capital in excess of par - 902660

Retained earnings - 345023

What total value can the firm pay out as dividends without impairing its legal capital?

Question 2: A dividend policy must be formulated considering two basic objectives. List the two basic objectives.

Question 3: The following table represents the earnings history over the last five years.

Year	EPS ( R)
2015	0.0
2014	3.0
2013	0.0
2012	2.0
2011	1.0

Additional information provided:

Payout per share - 0.85

Firm pays additional - 0.28 if EPS exceeds - 2.0

Determine the total dividends paid in 2012 and 2014.

Question 4:

Share ownership of Firm ABC - 15124 shares

Firm declares stock dividend of - 17 %

Share price - 8

What is market value (rand) of ownership in firm ABC after stock dividend?

Question 5:

Shares outstanding for Firm XYZ - 154586 shares

Par value - 3

Firm declares stock dividend of - 18 %

Share price pre stock dividend - 20

Earnings available to common shareholders - 592752

What is price of share post stock dividend?

What is the P/E ratio post stock dividend?

The following represents Equity Account of Firm XYZ

Common stock - 463758

Paid-in capital in excess of par - 582498

Retained earnings - 2140664

Total Stockholders' equity - 3186920

Based on above information, rework the stockholders' equity account post the stock dividend.

Question 6: Anglo INK pays dividends at a constant payout ratio. The company's net income (earnings) has been growing at a steady rate per year over the last few years and it's expected to continue. The share price took a beating last year (2015) and has depreciated over this current year (2016). This decline has continued while the ALSI average has been increasing. As a result thereof, shareholders are very perturbed and have pressured the management team of Anglo INK to do something.

You have been asked to look at various alternatives to satisfy the shareholders.

The alternatives are:

a) Maintain constant payout ratio of 20%

b) Increase constant payout ratio to 44%

c) Maintain current constant payout ratio but repurchase stock in an amount equal to foregone increase needed to achieve the constant payout ratio in "b" above

Growth in earnings - 5%

Year 2015 2016

Share price 40 36

Assumption: Financing growth could be met through retained earnings i.e., no external financing needed

Additional information provided:

Net income (EACS) - 4154

Abridged Stockholders' Equity Account of Anglo INK for 2015

Common stock @ 10 par 11134

Retained Earnings 4490

Total Equity R 15624

a) Calculate the EPS, total dividends and DPS for 2015 based on current payout ratio.

b) Calculate the EPS, total dividends and DPS for 2016 based on alternative A and alternative B.

c) With reference to the retained earnings balance of abridged equity account above, show the impact on the retained earnings balance for 2016 for both constant payout ratios i.e. alternative A and alternative B.

d) Based on alternative 3, the firm decides to repurchase shares at 2016 share price. Determine the number of shares the firm can repurchase.

Question 7:

Firm issues preferred stock at - 10 %

Current price of preferred stock - 26

Face value of preferred stock - 37

What is the dividend?

Question 8:

Firm issues preferred stock at - 12 %

Par value - 100

Issuing and flotation costs - 5

Tax rate - 36 %

What is the cost of preferred stock?

Question 9:

Dividend just paid - 4

Stock price - 44

Growth rate - 10 %

flotation costs - 7

What is cost of new common stock?

Question 10:

3-month SA treasury bill rate - 4 % SA refers to South Africa

beta coefficient - 0.38

market risk premium - 11 %

What is the cost of retained earnings?

Question 11:

EACS - 829671

Constant payout ratio - 43 %

Target capital structure

Long-term debt - 35 %

Preferred stock - 11 %

Equity - 54 %

What capital budget could the firm support without issuing new common stock?

Question 12:

Maturity - 12 years

Coupon rate - 14 %

Bond price - 1151

Tax rate - 39 %

Determine the after-tax cost of debt.

Question 13 - Please refer to Question 8, 9, 10, 11 and 12 above. Assume you have been presented with these values and have to calculate the WACC for your firm. Thus, based on the values presented, determine the WACC prior to the firm exhausting retained earnings. Determine the WACC after the firm had exhausted retained earnings.

Question 14: Your company has compiled the following data which is based on current costs relative to its sources of external capital ie long-term debt, preferred stock and common stock equity for various ranges of financing.

Source of Capital	After-tax Cost		Range of Total New Financing
Long-term debt	6	%	0	to	1818403
	10		1818404	to	3925946
	13		3925947	to	above
Preferred stock	19		0	to	613627
	21		613628	to	above
Common stock equity	22		0	to	1245538
	23		1245539	to	2929514
	24		2929514	to	3996817
	25		3996817	to	above

Current retained earnings in coming year - 733193

Cost of retained earnings based on current earnings - 22 %

The target capital structure proportions are:

Target capital structure

Long-term debt - 37 %

Preferred stock - 7 %

Equity - 56 %

Calculate the WACC prior to the firm exhausting its retained earnings

The firm expects its range of total new financing to be - 3139164

Calculate the WACC based on new range.

Attachment:- Assignment.rar

Reference no: EM131266476

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