The selling price of the preference shares is P150. the business is subject to a 30% income tax rate and has declared dividends to preference shares of P6 the previous year. Required: Compute the cost of preference share.
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Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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- Kelly Corporation is considering the issuance of either debt or preferred stock to finance the purchase of a facility costing P1.5 million. The interest rate on the debt is 16 percent. Preferred stock has a dividend rate of 12 percent. The tax rate is 46 percent. REQUIREMENTS: 1. What is the annual interest payment? 2. What is the annual dividend payment? 3. What is the required income before interest and taxes to satisfy the dividend requirement??A. ABC Corp., expects a net income of Php. 250,000. The company has 10% of 5,000,000 Debentures. The equity capitalization rate of the company is 10%. 1. Calculate the value of the firm and overall capitalization rate according to the net income approach (ignoring income tax). 2. If the debenture debt is increased to Php. 750,000 and interest of debt is change to 8%. What is the value of the firm and overall capitalization rate?PROBLEM A. A. ABC Corp., expects a net income of Php. 250,000. The company has 10% of 5,000,000 Debentures. The equity capitalization rate of the company is 10%. 1. Calculate the value of the firm and overall capitalization rate according to the net income approach (ignoring income tax). 2. If the debenture debt is increased to Php. 750,000 and interest of debt is change to 8%. What is the value of the firm and overall capitalization rate? B. Yuki's projected net operating income of Php. 85,000. It has Php. 3,00,000, 5% debentures. 1. Calculate the value of the firm according to 10 net opening income and overall capitalization rate is 10%. 2. If debenture debt is increased to Php. 100,000. What is the value of the firm and the equity capitalization rate?
- Shoobee, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average of capital. The WACC it to be measured by using the following weights: 50% long term, 10% preferred stock, and 40% common stock equity (retained earnings, new common stock issuance, or both). The firm tax is 25%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred stock: 8 percent (annual dividend) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2.00 per share must be paid to the underwriters. Common stock: The firm’s common stock is currently selling for P50 per share. The recent dividend paid was P4.00 per share. Its dividend payments which have approximately 60% of earnings per share in each past 6 years follows: Year Dividend 2021 P4.00 2020 3.75…EDC will be issuing preference shares with a total face value of P120,000,000 for a net proceed of P122,000,000. It will be irredeemable and will pay 8% annually. If the tax rate is 25%, what is the effective cost of the preference shares?ABC SAOG needs RO. 5 million for the installation of a new factory. The new factory expects to yield annual Earnings Before Interest and Tax (EBIT) of RO. 600,000. In choosing a financial plan, ABC SAOG has an objective of maximizing earnings per share (EPS). The company proposes to issue ordinary shares and raise the debt of RO. 500,000, RO. 1,500,000 or RO. 2,000,000. The current market price per share is RO. 350 and is expected to drop to RO. 150 if the funds are borrowed in excess of RO. 1,800,000. Funds can be borrowed at the following rates: Up to RO. 500,000 at 7% Over RO. 500,000 to RO. 2,000,000 at 9% Over RO. 2,000,000 at 14% Assuming a tax rate of 40%, advise the company.
- Net profit of Lily Fashion House Ltd in the current year is $2,575, 000. The company is planningto launch a project that will requires an investment of $745 000 next year. Today the company’sstock has market value of $22/share. Lily Fashion House has the current capital structure of 60%in equity and 40% in debt. Required:a. The company is paying a cash dividend of $4.50/share plus an extra-cash dividend of$1.5/share. Tomorrow the stock will go ex-dividend. Explain why there is ex-dividend dateand ex-dividend price? Calculate the ex-dividend price tomorrow morning. Assuming thetax on dividend is 25%?Net profit of Lily Fashion House Ltd in the current year is $2,575, 000. The company is planningto launch a project that will requires an investment of $745 000 next year. Today the company’sstock has market value of $22/share. Lily Fashion House has the current capital structure of 60%in equity and 40% in debt. Required:a. The company is paying a cash dividend of $4.50/share plus an extra-cash dividend of$1.5/share. Tomorrow the stock will go ex-dividend. Floral Textile Ltd. is a daughter company of the Lily Fashion House Group and currentlyunder a liquidation plan due to severe business contraction caused by the COVID 19pandemic. The company plans to pay a total dividend of $3.5 million now and $ 8.5 millionone year from now as a liquidating dividend. The required rate of return for shareholdersis 13.5%. Calculate the current value of the firm’s equity in total and per share if the firmhas 2.5 million shares outstanding?Net profit of Lily Fashion House Ltd in the current year is $2,575, 000. The company is planning to launch a project that will requires an investment of $745 000 next year. Today the company’s stock has market value of $22/share. Lily Fashion House has the current capital structure of 60% in equity and 40% in debt. Required:a. The company is paying a cash dividend of $4.50/share plus an extra-cash dividend of $1.5/share. Tomorrow the stock will go ex-dividend. Explain why there is ex-dividend date and ex-dividend price? Calculate the ex-dividend price tomorrow morning. Assuming the tax on dividend is 25%? b. How much dividend Lily Fashion House can pay its shareholders this year and what is dividend payout ratio of the company. Assume the Residual Dividend Payout Policy applies? c. Floral Textile Ltd. is a daughter company of the Lily Fashion House Group and currently under a liquidation plan due to severe business contraction caused by the COVID 19 pandemic. The company plans to pay…
- Net profit of Lily Fashion House Ltd in the current year is $2,575, 000. The company is planningto launch a project that will requires an investment of $745 000 next year. Today the company’sstock has market value of $22/share. Lily Fashion House has the current capital structure of 60%in equity and 40% in debt. Required:a. The company is paying a cash dividend of $4.50/share plus an extra-cash dividend of$1.5/share. Tomorrow the stock will go ex-dividend. Explain why there is ex-dividend dateand ex-dividend price? Calculate the ex-dividend price tomorrow morning. Assuming thetax on dividend is 25%?b. How much dividend Lily Fashion House can pay its shareholders this year and what isdividend payout ratio of the company. Assume the Residual Dividend Payout Policyapplies?You are working for an imports-exports company. In the current financial year, your company has a net income of $851,000 and plans to use a part of it as retained earnings for a new project which will cost $500,000 next year. The company’s stock is currently listed and actively traded on ASX. Required: Your company is going to pay an annual dividend of $5 per share and extra dividend of $2 per share in 4 weeks. The standard process of settlement in ASX is T+2. If tomorrow is the ex-dividend date, when is the record date for dividend payment? calculate the ex-dividend price if today’s market price is $43.5, given the dividend tax rate is 13%.IXYZ Ltd., experts a net income of $150,000. The company has 10% 500,000 debentures. The equity capitalization rate of the company is 10%.g(a) Calculate the value of the firm and overall capitalization rate accordint the net income approach (ignore income tax).(b) If the debenture debt is increased to $750,000 and interest of debt inchange to 9%. What is the value of the firm and overall capitalizatiorate?