â€å“ipod Tax, â€â in 2009 That Would Tax Music, Software Downloads, and Pornography Updated FREE
â€å"ipod Tax, â€â in 2009 That Would Tax Music, Software Downloads, and Pornography
Question 31 a - Sample
The post-obit statement of financial position information relates to Tufa Co, a company listed on a large stock marketplace which pays corporation tax at a rate of xxx%.
| $thousand | $m | |
|---|---|---|
| Disinterestedness and liabilities | ||
| Share capital | 17 | |
| Retained earnings | 15 | |
| Total equity | 32 | |
| Not-current liabilities | ||
| Long-term borrowings | 13 | |
| Current liabilities | 21 | |
| Full 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 toll of $7·07 per share and a cum dividend market price of $7·52 per share. The dividend for 20X7 will be paid in the near future.
Dividends paid in recent years have been as follows:
| Yr | 20X6 | 20X5 | 20X4 | 20X3 |
|---|---|---|---|---|
| Dividend ($/share) | 0·43 | 0·41 | 0·39 | 0·37 |
The 5% preference shares of Tufa Co have a nominal value of $0·50 per share and an ex dividend marketplace price of $0·31 per share.
The long-term borrowings of Tufa Co consist of $10m of loan notes and a $3m depository financial institution loan. The bank loan has a variable interest rate.
The 7% loan notes have a nominal value of $100 per loan note and a market cost of $102·34 per loan annotation. Annual interest has just been paid and the loan notes are redeemable in iv years' fourth dimension at a 5% premium to nominal value.
Required:
(a) Summate the later on-tax weighted average cost of capital of Tufa Co on a marketplace value basis. (11 marks)
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Question 32 a - Specimen
DD Co has a dividend payout ratio of twoscore% and has maintained this payout ratio for several years. The current dividend per share of the company is $0·fifty per share and information technology expects that its next dividend per share, payable in one year's time, will be $0·52 per share.
The capital structure of the company is equally follows:
| $m | $m | |
|---|---|---|
| Equity | ||
| Ordinary shares (nominal value $1 per share) | 25 | |
| Reserves | 35 | |
| sixty | ||
| Debt | ||
| Bail A (nominal value $100) | 20 | |
| Bail B (nominal value $100) | 10 | |
| 30 | ||
| 90 |
Bail A will be redeemed at nominal in ten years' fourth dimension and pays annual interest of nine%. The cost of debt of this bond is ix·83% per year. The current ex interest market toll of the bail is $95·08.
Bond B will be redeemed at nominal in four years' time and pays annual interest of 8%. The cost of debt of this bond is 7·82% per year. The current ex interest market price of the bond is $102·01.
DD Co has a price of equity of 12·iv%. Ignore taxation.
Required:
(a) Calculate the post-obit values for DD Co:
(i) ex dividend share price, using the dividend growth model; (3 marks)
(two) majuscule gearing (debt divided by debt plus disinterestedness) using market values; and (2 marks)
(iii) market place value weighted average cost of capital. (2 marks)
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Question 4 a - Sample
Dinla Co has the following upper-case letter structure.
| Equity and reserves | $000 | $000 |
|---|---|---|
| Ordinary shares | 23,000 | |
| Reserves | 247,000 | 270,000 |
| Non-current liabilities | ||
| 5% Preference shares | five,000 | |
| vi% Loan notes | 11,000 | |
| Banking concern loan | 3,000 | |
| xix,000 | ||
| 289,000 |
The ordinary shares of Dinla Co are currently trading at $four·26 per share on an ex dividend ground and take a nominal value of $0·25 per share. Ordinary dividends are expected to grow in the future by 4% per yr and a dividend of $0·25 per share has just been paid.
The v% preference shares take an ex dividend market 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 note on an ex interest footing and will exist redeemed at their nominal value of $100 per loan note in v years' fourth dimension.
The bank loan has a fixed interest charge per unit of seven% per year.
Dinla Co pays corporation revenue enhancement at a rate of 25%.
Required:
(a) Calculate the after-tax weighted average toll of capital of Dinla Co on a marketplace value footing. (8 marks)
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Question 4 b -
KQK Co wants to raise $20 million in social club to expand its business and wishes to evaluate 1 possibility, which is an effect of eight% loan notes. Extracts from the financial statements of KQK Co are as follows.
| $k | ||
|---|---|---|
| Income | 140·0 | |
| Cost of sales and other expenses | 112·0 | |
| Profit earlier interest and tax | 28·0 | |
| Finance charges (interest) | 2·8 | |
| Profit before revenue enhancement | 25·2 | |
| Taxation | 7·vi | |
| Profit after tax | 17·half-dozen | |
| $m | $1000 | |
| Equity finance | ||
| Ordinary shares ($1 nominal) | 25·0 | |
| Reserves | 118·five | 143·5 |
| Not-current liabilities | 36·0 | |
| Current liabilities | 38·3 | |
| Full disinterestedness and liabilities | 217·viii |
It is expected that investing $twenty million in the business volition increment income by 5% over the outset year. Approximately forty% of price of sales and other expenses are fixed, the remainder of these costs are variable. Fixed costs will not be afflicted past the business expansion, while variable costs will increment in line with income.
KQK Co pays corporation revenue enhancement at a rate of 30%. The company has a policy of paying out forty% of turn a profit after tax as dividends to shareholders.
Current liabilities are expected to increment by three% past the terminate of the get-go twelvemonth following the business expansion.
| Average values of other companies like to KQK Co: | |
|---|---|
| Debt/equity ratio (volume value basis): | 30% |
| Interest embrace: | 10 times |
| Operational gearing (contribution/PBIT): | ii times |
| Return on equity: | 15% |
Required:
(b) Discuss the circumstances under which the current weighted boilerplate cost of capital letter of a company could exist used in investment appraisal and indicate briefly how its limitations as a discount charge per unit could be overcome. (v marks)
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MC Question 19 -
On a market value ground, GFV Co is financed 70% by equity and 30% past debt. The company has an after-tax cost of debt of half dozen% and an equity beta of 1·2. The run a risk-free rate of return is iv% and the equity run a risk premium is 5%.
What is the after-tax weighted average cost of capital of GFV Co?
A. five·4%
B. 7·2%
C. eight·3%
D. 8·viii%
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Question 5 a -
Tinep Co is planning to raise funds for an expansion of existing business activities and in preparation for this the company has decided to calculate its weighted average cost of upper-case letter. Tinep Co has the following capital construction:
| $m | $m | |
|---|---|---|
| Equity | ||
| Ordinary shares | 200 | |
| Reserves | 650 | |
| 850 | ||
| Not-electric current liabilities | ||
| Loan notes | 200 | |
| 1,050 |
The ordinary shares of Tinep Co have a nominal value of 50 cents per share and are currently trading on the stock market on an ex dividend footing at $five·85 per share. Tinep Co has an disinterestedness beta of ane·xv.
The loan notes have a nominal value of $100 and are currently trading on the stock market on an ex involvement footing at $103·fifty per loan note. The interest on the loan notes is 6% per year before revenue enhancement and they will be redeemed in half-dozen years' fourth dimension at a half-dozen% premium to their nominal value.
The risk-free rate of return is 4% per year and the equity gamble premium is half-dozen% per year. Tinep Co pays corporation tax at an annual rate of 25% per twelvemonth.
Required:
(a) Summate the marketplace value weighted average cost of capital and the book value weighted average cost of capital of Tinep Co, and comment briefly on whatever difference between the two values. (ix marks)
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Question v a iii - Specimen
DD Co has a dividend payout ratio of twoscore% and has maintained this payout ratio for several years. The electric 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 fourth dimension, will be 52c per share.
The majuscule structure of the company is as follows:
| $m | $g | |
|---|---|---|
| Equity | ||
| Ordinary shares (par value $1 per share) | 25 | |
| Reserves | 35 | |
| lx | ||
| Debt | ||
| Bond A (par value $100) | 20 | |
| Bond B (par value $100) | 10 | |
| 30 | ||
| 90 |
Bond A will be redeemed at par in ten years' fourth dimension and pays almanac involvement of 9%. The cost of debt of this bond is 9·83% per yr. The current ex interest market price of the bail is $95·08.
Bail B will be redeemed at par in four years' fourth dimension and pays almanac involvement of viii%. The toll of debt of this bond is 7·82% per twelvemonth. The current ex involvement market price of the bail is $102·01.
DD Co has a cost of equity of 12·4%. Ignore tax.
Required:
(a) Calculate the post-obit values for DD Co:
(3) market value weighted boilerplate cost of capital. (2 marks)
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Question iii a -
The equity beta of Contend Co is 0•9 and the company has issued 10 one thousand thousand ordinary shares. The marketplace value of each ordinary share is $7•50. The company is likewise financed by 7% bonds with a nominal value of $100 per bond, which will be redeemed in seven years' time at nominal value. The bonds take a full nominal value of $14 million. Interest on the bonds has just been paid and the current market place value of each bond is $107•14.
Contend Co plans to invest in a projection which is different to its existing business concern operations and has identified a company in the aforementioned business surface 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 million.
The risk-free rate of return is 4% per year and the average render on the stock market is 11% per year. Both companies pay corporation tax at a rate of 20% per yr.
Required:
(a) Calculate the current weighted average price of upper-case letter of Fence Co. (7 marks)
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Question 2 c -
Carte Co has in upshot 8 million shares with an ex dividend market place value of $vii·16 per share. A dividend of 62 cents per share for 2013 has just been paid. The pattern of recent dividends is equally follows:
| Year | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|
| Dividends per share (cents) | 55.i | 57.9 | 59.1 | 62.0 |
Card Co as well has in issue 8•v% bonds redeemable in five years' time with a total nominal value of $5 million. The market place value of each $100 bond is $103•42. Redemption will exist at nominal value.
Card Co is planning to invest a significant amount of money into a joint venture in a new business concern area. It has identified a proxy company with a similar business concern take a chance to the joint venture. The proxy company has an disinterestedness beta of 1•038 and is financed 75% past equity and 25% past debt, on a market value ground.
The current risk-gratuitous rate of return is iv% and the average disinterestedness risk premium is 5%. Carte du jour Co pays profit tax at a rate of xxx% per year and has an equity beta of 1•6.
Required:
Calculate the weighted average after-tax cost of capital of Card Co using a cost of equity of 12%.
(v marks)
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Question 2 a -
AMH Co wishes to calculate its current toll of capital for use every bit a discount charge per unit in investment appraisal. The following financial information relates to AMH Co:
The ordinary shares of AMH Co take an ex div market value of $4·70 per share and an ordinary dividend of 36·iii cents per share has just been paid. Historic 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 bond and accept an ex interest marketplace value of $104·fifty per bond. The depository financial institution loan has a variable interest rate that has averaged iv% per year in contempo years.
AMH Co pays profit tax at an annual charge per unit of 30% per year.
Required:
Calculate the market value weighted boilerplate cost of capital of AMH Co.
(12 marks)
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Question 3 a, b -
The argument of fiscal position of BKB Co provides the post-obit information:
| $m | $m | |
| equity finance | ||
| ordinary shares ($i nominal value) | 25 | |
| reserves | 15 | xl |
| ---- | ||
| not-electric current liabilities | ||
| vii% convertible bonds ($100 nominal value) | 20 | |
| 5% preference shares ($one nominal value) | x | 30 |
| ---- | ||
| current liabilities | ||
| merchandise payables | 10 | |
| overdraft | 15 | 25 |
| ---- | ---- | |
| full liabilities | 95 | |
| ---- |
BKB Co has an disinterestedness beta of one·2 and the ex-dividend marketplace value of the visitor'southward disinterestedness is $125 million. The ex-interest market place value of the convertible bonds is $21 million and the ex-dividend market value of the preference shares is $6·25 meg.
The convertible bonds of BKB Co have a conversion ratio of 19 ordinary shares per bail. The conversion appointment and redemption date are both on the aforementioned date in v years' fourth dimension. The current ordinary share price of BKB Co is expected to increase by 4% per yr for the foreseeable future.
The overdraft has a variable interest charge per unit which is currently 6% per year and BKB Co expects this to increase in the almost future. The overdraft has non changed in size over the last financial year, although one year agone the overdraft interest rate was iv% per year. The company's bank will non allow the overdraft to increase from its current level.
The equity run a risk premium is v% per year and the risk-free rate of return is four% per year. BKB Co pays turn a profit revenue enhancement at an almanac charge per unit of 30% per year.
Required:
(a) Calculate the market place value after-tax weighted average cost of capital of BKB Co, explaining conspicuously any assumptions you make.
(b) Discuss why marketplace value weighted average cost of capital is preferred to volume value weighted average cost of majuscule when making investment decisions.
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Question 4 c -
Corhig Co is a company that is listed on a major stock exchange. The company has struggled to maintain profitability in the final ii years due to poor economic conditions in its domicile country and as a consequence it has decided not to pay a dividend in the current twelvemonth. Notwithstanding, there are at present articulate signs of economic recovery and Corhig Co is optimistic that payment of dividends tin exist resumed in the future. Forecast financial data relating to the visitor is as follows:
| year | 1 | 2 | iii |
| earnings ($000) | 3000 | 3600 | 4300 |
| dividends ($000) | zero | 500 | one thousand |
The company is optimistic that earnings and dividends will increase after Year 3 at a constant annual rate of three% per yr.
Corhig Co currently has a before-tax price of debt of 5% per year and an equity beta of 1•6. On a marketplace value basis, the visitor is currently financed 75% past equity and 25% by debt.
During the course of the final ii years the company acted to reduce its gearing and was able to redeem a large amount of debt. Since there are now articulate signs of economic recovery, Corhig Co plans to heighten further debt in gild to modernise some of its not-current assets and to support the expected growth in earnings.
This boosted debt would mean that the capital structure of the company would modify and it would be financed 60% by equity and 40% by debt on a market place value basis. The earlier-revenue enhancement cost of debt of Corhig Co would increment to six% per year and the equity beta of Corhig Co would increase to 2.
The take chances-free rate of return is 4% per year and the equity risk premium is five% per year. In order to stimulate economic activity the authorities has reduced turn a profit tax rate for all large companies to 20% per yr.
The electric current average cost/earnings ratio of listed companies similar to Corhig Co is v times.
Required:
Summate the electric current weighted boilerplate afterward-tax cost of capital of Corhig Co and the weighted average afterwards-tax cost of uppercase following the new debt issue, and comment on the divergence betwixt the two values.
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Question 3 c -
Recent financial information relating to Close Co, a stock market listed company, is every bit follows.
| $m | ||
| profit after tax (earnings) | 66.6 | |
| dividends | 40.0 | |
| statement of fiscal position information | ||
| $m | $m | |
| not current assets | 595 | |
| electric current assets | 125 | |
| ------- | ||
| total avails | 720 | |
| ------- | ||
| current liabilities | 70 | |
| equity | ||
| ordinary shares ($1 nominal) | 80 | |
| reserves | 410 | |
| ------- | ||
| 490 | ||
| not current liabilities | ||
| 6% banking concern loan | 40 | |
| viii% bonds ($100 nominal) | 120 | |
| ------- | ||
| 160 | ||
| ------- | ||
| 720 | ||
| ------- |
Financial analysts have forecast that the dividends of Shut Co will grow in the futurity at a rate of 4% per twelvemonth. This is slightly less than the forecast growth rate of the profit subsequently taxation (earnings) of the company, which is v% per year.
The finance director of Shut Co thinks that, considering the risk associated with expected earnings growth, an earnings yield of 11% per yr can be used for valuation purposes.
Close Co has a price of equity of 10% per year and a before-revenue enhancement cost of debt of 7% per year. The 8% bonds will be redeemed at nominal value in vi years' time. Shut Co pays tax at an annual rate of thirty% per year and the ex-dividend share price of the company is $8·50 per share.
Required:
Calculate the weighted average subsequently-tax cost of capital of Close Co using marketplace values where advisable.
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