The Cost Of The Paint Was $39 Per Gallon, So If The Cost Is $4,368, How Many Gallons Did You Buy?
Question 31 a - Sample
The following argument of financial position information relates to Tufa Co, a company listed on a large stock market which pays corporation tax at a rate of xxx%.
| $m | $m | |
|---|---|---|
| Equity and liabilities | ||
| Share capital letter | 17 | |
| Retained earnings | 15 | |
| Total equity | 32 | |
| Non-current liabilities | ||
| Long-term borrowings | 13 | |
| Current liabilities | 21 | |
| Total liabilities | 34 | |
| Total disinterestedness and liabilities | 66 |
The share capital 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 place price of $7·07 per share and a cum dividend market price of $7·52 per share. The dividend for 20X7 will be paid in the nigh future.
Dividends paid in contempo years have been as follows:
| Year | 20X6 | 20X5 | 20X4 | 20X3 |
|---|---|---|---|---|
| Dividend ($/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 market toll of $0·31 per share.
The long-term borrowings of Tufa Co consist of $10m of loan notes and a $3m bank loan. The banking concern loan has a variable interest rate.
The vii% loan notes take a nominal value of $100 per loan note and a market cost of $102·34 per loan notation. Annual interest has merely been paid and the loan notes are redeemable in four years' time at a 5% premium to nominal value.
Required:
(a) Calculate the later-tax weighted boilerplate cost of capital of Tufa Co on a market 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 $0·50 per share and it expects that its next dividend per share, payable in one yr's time, will exist $0·52 per share.
The uppercase construction of the company is as follows:
| $m | $grand | |
|---|---|---|
| Equity | ||
| Ordinary shares (nominal value $1 per share) | 25 | |
| Reserves | 35 | |
| 60 | ||
| Debt | ||
| Bond A (nominal value $100) | twenty | |
| Bond B (nominal value $100) | ten | |
| 30 | ||
| ninety |
Bond A will be redeemed at nominal in x years' fourth dimension and pays annual involvement of 9%. The toll of debt of this bail is nine·83% per year. The current ex involvement market toll of the bond is $95·08.
Bond B will be redeemed at nominal in four 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 bail is $102·01.
DD Co has a price of equity of 12·4%. Ignore taxation.
Required:
(a) Calculate the following values for DD Co:
(i) ex dividend share price, using the dividend growth model; (3 marks)
(ii) majuscule gearing (debt divided by debt plus disinterestedness) using market values; and (ii marks)
(iii) marketplace value weighted average price of capital. (2 marks)
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Question 4 a - Sample
Dinla Co has the following majuscule construction.
| Equity and reserves | $000 | $000 |
|---|---|---|
| Ordinary shares | 23,000 | |
| Reserves | 247,000 | 270,000 |
| Not-current liabilities | ||
| five% Preference shares | 5,000 | |
| 6% Loan notes | 11,000 | |
| Banking company loan | 3,000 | |
| 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 time to come by iv% per twelvemonth and a dividend of $0·25 per share has just been paid.
The five% preference shares have an ex dividend market place 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 involvement ground and will be redeemed at their nominal value of $100 per loan note in v years' time.
The bank loan has a stock-still interest rate of seven% per year.
Dinla Co pays corporation taxation at a charge per unit of 25%.
Required:
(a) Summate the afterwards-tax weighted average cost of capital letter of Dinla Co on a market value basis. (8 marks)
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Question iv b -
KQK Co wants to heighten $twenty 1000000 in order to expand its business organization and wishes to evaluate one possibility, which is an effect of viii% loan notes. Extracts from the fiscal statements of KQK Co are as follows.
| $grand | ||
|---|---|---|
| Income | 140·0 | |
| Cost of sales and other expenses | 112·0 | |
| Turn a profit before interest and tax | 28·0 | |
| Finance charges (involvement) | 2·eight | |
| Profit before tax | 25·ii | |
| Taxation | vii·6 | |
| Profit afterward tax | 17·6 | |
| $m | $m | |
| Equity finance | ||
| Ordinary shares ($1 nominal) | 25·0 | |
| Reserves | 118·five | 143·five |
| Non-current liabilities | 36·0 | |
| Current liabilities | 38·3 | |
| Total equity and liabilities | 217·viii |
It is expected that investing $20 million in the business will increase income past 5% over the showtime twelvemonth. Approximately 40% of cost of sales and other expenses are stock-still, the residual of these costs are variable. Fixed costs will not be affected by the business expansion, while variable costs will increase in line with income.
KQK Co pays corporation taxation at a rate of 30%. The company has a policy of paying out xl% of turn a profit after taxation as dividends to shareholders.
Current liabilities are expected to increment by 3% by the end of the commencement year following the business organisation expansion.
| Boilerplate values of other companies similar to KQK Co: | |
|---|---|
| Debt/equity ratio (book value ground): | 30% |
| Interest cover: | 10 times |
| Operational gearing (contribution/PBIT): | 2 times |
| Render on disinterestedness: | 15% |
Required:
(b) Discuss the circumstances under which the electric current weighted boilerplate cost of uppercase of a company could be used in investment appraisal and betoken briefly how its limitations every bit a discount charge per unit could exist overcome. (5 marks)
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MC Question 19 -
On a marketplace value basis, GFV Co is financed seventy% by disinterestedness and thirty% by debt. The company has an subsequently-tax cost of debt of 6% and an equity beta of 1·2. The chance-complimentary rate of return is 4% and the equity risk premium is five%.
What is the later on-tax weighted boilerplate toll of majuscule of GFV Co?
A. 5·4%
B. 7·2%
C. viii·3%
D. 8·8%
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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 capital. Tinep Co has the post-obit capital construction:
| $yard | $g | |
|---|---|---|
| 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 50 cents per share and are currently trading on the stock market on an ex dividend ground at $5·85 per share. Tinep Co has an equity beta of 1·xv.
The loan notes have a nominal value of $100 and are currently trading on the stock market on an ex interest basis at $103·50 per loan annotation. The interest on the loan notes is 6% per year before tax and they will exist redeemed in six years' time at a half-dozen% premium to their nominal value.
The take chances-free rate of return is 4% per year and the equity risk premium is 6% per year. Tinep Co pays corporation tax at an annual rate of 25% per year.
Required:
(a) Calculate the marketplace value weighted average cost of capital letter and the book value weighted average price of capital of Tinep Co, and comment briefly on any difference between the ii values. (nine marks)
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Question v a three - 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 company is 50c per share and it expects that its next dividend per share, payable in one year'south time, will be 52c per share.
The majuscule construction of the visitor is equally follows:
| $k | $m | |
|---|---|---|
| Disinterestedness | ||
| Ordinary shares (par value $1 per share) | 25 | |
| Reserves | 35 | |
| 60 | ||
| Debt | ||
| Bond A (par value $100) | 20 | |
| Bond B (par value $100) | ten | |
| thirty | ||
| 90 |
Bond A will be redeemed at par in ten years' time and pays annual interest of 9%. The price of debt of this bond is 9·83% per twelvemonth. The current ex interest marketplace price of the bond is $95·08.
Bond B will be redeemed at par in four years' time and pays annual involvement of 8%. The cost of debt of this bond is seven·82% per year. The current ex involvement market price 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:
(iii) marketplace value weighted boilerplate toll of uppercase. (2 marks)
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Question iii a -
The equity beta of Fence Co is 0•9 and the company has issued x million ordinary shares. The marketplace value of each ordinary share is $7•50. The company is also financed by 7% bonds with a nominal value of $100 per bond, which will be redeemed in seven years' fourth dimension at nominal value. The bonds have a full nominal value of $fourteen 1000000. Interest on the bonds has just been paid and the current market value of each bond is $107•fourteen.
Fence Co plans to invest in a project which is different to its existing business operations and has identified a visitor in the aforementioned business concern area as the project, Hex Co. The equity beta of Hex Co is 1•ii and the visitor has an equity market value of $54 million. The market value of the debt of Hex Co is $12 million.
The adventure-costless rate of return is 4% per year and the average return on the stock market is eleven% per year. Both companies pay corporation revenue enhancement at a charge per unit of 20% per year.
Required:
(a) Calculate the current weighted average toll of upper-case letter of Debate Co. (7 marks)
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Question 2 c -
Menu Co has in issue viii million shares with an ex dividend market value of $seven·16 per share. A dividend of 62 cents per share for 2013 has just been paid. The pattern of recent dividends is as follows:
| Year | 2010 | 2011 | 2012 | 2013 |
|---|---|---|---|---|
| Dividends per share (cents) | 55.1 | 57.9 | 59.1 | 62.0 |
Card Co also has in issue viii•5% bonds redeemable in five years' time with a total nominal value of $v 1000000. The market value of each $100 bond is $103•42. Redemption will be at nominal value.
Card Co is planning to invest a significant corporeality of money into a joint venture in a new business area. It has identified a proxy visitor with a similar concern run a 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 place value ground.
The current hazard-free rate of return is 4% and the average disinterestedness risk premium is five%. Card Co pays profit revenue enhancement at a rate of xxx% per year and has an equity beta of one•vi.
Required:
Calculate the weighted average after-taxation cost of capital of Card Co using a price of disinterestedness of 12%.
(5 marks)
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Question 2 a -
AMH Co wishes to summate its current toll of capital for utilise as a discount rate in investment appraisal. The following financial information relates to AMH Co:
The ordinary shares of AMH Co accept an ex div market value of $4·70 per share and an ordinary dividend of 36·3 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 market value of 40 cents per share. The vii% bonds are redeemable at a 5% premium to their nominal value of $100 per bail and accept an ex interest market value of $104·50 per bail. The bank loan has a variable interest rate that has averaged iv% per year in recent years.
AMH Co pays profit taxation at an annual rate of thirty% per year.
Required:
Summate the market value weighted boilerplate toll of capital of AMH Co.
(12 marks)
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Question three a, b -
The statement of financial position of BKB Co provides the post-obit information:
| $thousand | $m | |
| equity finance | ||
| ordinary shares ($i nominal value) | 25 | |
| reserves | 15 | 40 |
| ---- | ||
| non-current liabilities | ||
| 7% convertible bonds ($100 nominal value) | 20 | |
| v% preference shares ($1 nominal value) | 10 | 30 |
| ---- | ||
| current liabilities | ||
| trade payables | 10 | |
| overdraft | 15 | 25 |
| ---- | ---- | |
| total liabilities | 95 | |
| ---- |
BKB Co has an equity beta of i·two and the ex-dividend market value of the company's disinterestedness is $125 million. The ex-interest market value of the convertible bonds is $21 million 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 xix ordinary shares per bail. The conversion date and redemption appointment are both on the same date in five years' time. The electric current ordinary share price of BKB Co is expected to increase by 4% per year for the foreseeable futurity.
The overdraft has a variable interest rate which is currently 6% per year and BKB Co expects this to increase in the near future. The overdraft has not changed in size over the last financial year, although ane year agone the overdraft interest rate was 4% per year. The company's bank will non permit the overdraft to increase from its electric current level.
The equity risk premium is v% per yr and the run a risk-free rate of return is iv% per year. BKB Co pays profit taxation at an annual rate of 30% per yr.
Required:
(a) Calculate the market value later on-tax weighted boilerplate cost of capital of BKB Co, explaining conspicuously any assumptions you make.
(b) Talk over why market value weighted boilerplate cost of upper-case letter is preferred to book value weighted boilerplate toll of capital when making investment decisions.
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Question 4 c -
Corhig Co is a company that is listed on a major stock commutation. The company has struggled to maintain profitability in the last 2 years due to poor economic atmospheric condition in its home country and as a event it has decided not to pay a dividend in the current yr. However, there are at present articulate signs of economical recovery and Corhig Co is optimistic that payment of dividends can be resumed in the future. Forecast financial information relating to the company is as follows:
| yr | 1 | 2 | 3 |
| earnings ($000) | 3000 | 3600 | 4300 |
| dividends ($000) | aught | 500 | 1000 |
The company is optimistic that earnings and dividends will increase later Year 3 at a constant annual charge per unit of iii% per twelvemonth.
Corhig Co currently has a earlier-revenue enhancement cost of debt of 5% per year and an equity beta of 1•six. On a marketplace value basis, the visitor is currently financed 75% by equity and 25% past debt.
During the grade of the terminal two years the company acted to reduce its gearing and was able to redeem a big amount of debt. Since there are now articulate signs of economic recovery, Corhig Co plans to heighten farther debt in social club to modernise some of its non-electric current assets and to back up the expected growth in earnings.
This boosted debt would mean that the capital structure of the company would change and it would be financed 60% by equity and xl% by debt on a market place value basis. The before-revenue enhancement cost of debt of Corhig Co would increment to 6% per twelvemonth and the equity beta of Corhig Co would increment to 2.
The risk-free rate of return is four% per twelvemonth and the disinterestedness take a chance premium is five% per year. In club to stimulate economic activity the authorities has reduced profit taxation charge per unit for all large companies to 20% per year.
The current average toll/earnings ratio of listed companies similar to Corhig Co is 5 times.
Required:
Summate the current weighted boilerplate afterward-tax cost of capital of Corhig Co and the weighted average after-taxation cost of majuscule following the new debt issue, and annotate on the difference betwixt the ii 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 subsequently tax (earnings) | 66.half dozen | |
| dividends | 40.0 | |
| argument of fiscal position information | ||
| $m | $m | |
| not electric current assets | 595 | |
| current assets | 125 | |
| ------- | ||
| total assets | 720 | |
| ------- | ||
| current liabilities | seventy | |
| equity | ||
| ordinary shares ($1 nominal) | 80 | |
| reserves | 410 | |
| ------- | ||
| 490 | ||
| non electric current liabilities | ||
| 6% bank loan | 40 | |
| 8% bonds ($100 nominal) | 120 | |
| ------- | ||
| 160 | ||
| ------- | ||
| 720 | ||
| ------- |
Financial analysts take forecast that the dividends of Close Co will abound in the future at a charge per unit of 4% per yr. This is slightly less than the forecast growth rate of the profit after tax (earnings) of the visitor, which is 5% per yr.
The finance manager of Close Co thinks that, considering the risk associated with expected earnings growth, an earnings yield of 11% per year tin exist used for valuation purposes.
Close Co has a cost of equity of 10% per year and a before-tax cost of debt of vii% per year. The viii% bonds will be redeemed at nominal value in six years' time. Shut Co pays tax at an almanac rate of 30% per twelvemonth and the ex-dividend share price of the visitor is $8·50 per share.
Required:
Calculate the weighted boilerplate subsequently-tax cost of capital letter of Close Co using market values where appropriate.
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Source: https://www.acowtancy.com/textbook/acca-fm/e2c-the-overall-cost-of-capital/wacc-putting-it-all-together/exam
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