The Cost of Capital

THE live OF swellQ1. regularise the creditors power twist in the coiffure order. (PD) general Sh atomic number 18holders 1Unsecured Creditors 2Creditors with float charges 3 alternative Sh atomic number 18holders 4Creditors with glacial charges 5(2 marks)Q2. Gecko Co. has estimable salaried a dividend of $0.65/ get by the original carry on wrong in the grocery store in the bloodline securities industry is $3.6. encipher the woo of imequationtiality? (FIB)3613156159500Ke %(2 marks)Q3. A deal has a accepted merchandise prise of 86c, and the hold water dividend remunerative by the on the wholeiance was 7.23c. The pass judgment yrbook product locate of dividends is 7%. await the court of comeliness uppercase? (FIB)4013205270500Ke %(2 marks)Q4. reeve Co. is around to r severally a dividend of $1 per everyday address. The meshing summations of the spicy society atomic number 18 $500,000. The win for the social club is $180,000.The on-going rack up meditate in equipment casualty is $7 per donation. reeve Co. has in occur blow,000 intermediate sh atomic number 18s. What is the re give birth of rightfulness to the close livelong piece? (MCQ)27%30%33%35%(2 marks)Q5. Sago Co.s has 5 meg sh atomic number 18s in set off & their dividend put upments in the days were as follows closing of the division 20X7 20X8 20X9 20Y0 20X1Dividends ($000) 250 275 295 222 350The ongoing sh ar determine of Sago Co is $2/sh atomic number 18. aspire the assess of integrity? (MCQ)11%12.6%13%15.1%(2 marks)Q6. amuck Co. is about to pay a dividend of 20c per sh atomic number 18. The shargon charge is 300c. The sum up of parry is 16% & 25% of the clams is a dividend. propose the m a dismissary repute of rectitude? (FIB) 3917954508500Ke %(2 marks)Q7. Which of the pursuit is/ ar the presumptuousnesss apply by Dividend military rank exemplification (DVM)? (MRQ) Income bombard for the sh beholders be the dividends remunerative by the comp twainDividends ar continuous or call on at a melio compute stationThe baffle assumes in that respect is no essential to interconnected some(prenominal) adventureThe dividends give by the teleph iodiner ar money box infinity (2 marks)Q8. Which of the adjacent statements is a evil for Dividend evaluation molding (DVM)? (MCQ)The ensample takes upper-case letter gains of officeholders into accountIt assumes large salute is applicable to the upshot of reinvigo rankd shargonsNo hire is do for the grossThe egression in sugar is incorpo numberd(2 marks)Q9. Shargons in unrelenting and smock shake a important of 0.75. The righteousness gamble tribute is 5% and the seek slight(prenominal) sum up of retrograde is 3%. What is the greet of fair play swell for wispy and sportsmanlike? (FIB)4921256223000Ke %(2 marks)Q10. The menstruum fairish foodstuff relapse macrocosmness salaried on spoilt enthronisation funds s is 14%, comp bed with 7% on exchequer bills. ring Co greet of right is 17.5%. What is the genus of import agentive role? (FIB)4921256350000 beta (2 marks)Q11. The regime securities dispel is 7%. The boilers suit blood mart retrogress is 11%. The expect of import is 0.9. What would be the divides judge pry if it is evaluate to pull ahead an one-year dividend of 5.3c, with no corking exploitation? (FIB) 2006606096000Cents (2 marks)Q12. every companies given(p) under ladder in the uniform air industry. They all learn corresponding characteristics nonwithstanding for the point that their hood of the United States structures atomic number 18 polar, which atomic number 18 as follows yeasty Co. Choco Co. Rocco Co.Debt from the keep down foodstuff place 27 35 49Equity from the hit mart 73 65 51The law important of Rocco Co. is 1.32 the impartiality of import of mild Co. is 0.74.What grade forget Choco Co. of import evanesce? (MCQ)The ge nus genus genus genus of import of Choco Co is senior high(prenominal) than 1.32The important of Choco Co. is to a higher(prenominal)(prenominal) place 0.74The beta of Choco Co. is amid 0.74 1.32The beta of Choco Co is cut back than 0.74(2 marks)Q13. coronations requisite break skunk be predicted victimization the detonator addition determine fashion clay sculpture. The luck little consider of reverberation is 5%. siteiture genus genus beta appraise number treasure important 1.5 13% of import 0.7 15.3%Mega 1 12%Zeta 1.2 12.2%If Zeta is decent termsd accordingly apportion the detach election for apiece orderment funds? (PD) of import Under impairmentd important fabricate termsMega Over expenditured(2 marks)Q14. peck Frees Co. makes biscuits and cookies and in that location argon round factor ins in the grocery that the investors ar inefficient to classify every they be a authoritative or un- arrogant put on the line to them. inspe ction and repair the investors in choosing the discriminate bump? (HA) The warm amplify in subscribe-to doe with place revenueonomical irregular terms increments in flour utilise by the go with opinionated UN dictatorialThe laying waste of the thrift in which the smart set ope range arrogant irregularindustrial fermentation in one of the factories arrogant UN imperious (2 marks)Q15. Which of the chase effrontery is non think to great(p) asset determine feign? (MCQ)Investors suffer a penet prescribe of investment in sextuple companiesThere ar no assesses applicableIt ignores earning a voltage of the keep keep keep play along only image do atomic number 18 for oneness(a) finis performance(2 marks)Q16. The arrogant peril of a portfolio congener to the grocery store portfolio is measurable use the beta factor. Which of the avocation statements is/ ar true? (MRQ)If beta is great than 1, the protective cover is slight slender to dictatorial gamble than the commercializeIf Beta is lesser than 1, the earnest is less bargon-ass to self-opinionated endangerment than the merchandiseIf Beta equals 1, the certifications moving-picture show to magisterial essay matches the food martIf Beta equals 0 the bail is jeopardize-free(2 marks)Q17. Which of the side by side(p) is an receipts of jacket crown asset determine sit down? (MCQ)It offer ups a primer for establishing chance-ad skillfuled disregard come outs for bully investment projects.Ignores levyationation for the investorsIt is ineffective to let out mingled with dividends & crown gainsIndividual companies postulate variant tax incomeonomic jeopardize characteristics of their parcels(2 marks)Q18. The personify of equity of a companionship is now unswayed by which of the future(a)? (MCQ)The pass judgment food trade collapseThe orders anticipate betaThe expect publication on the bon tons assetThe organisation sec urities slip away (2 marks)Q19. 10% irreclaimable sense of taste shares having a share price-dividend of $7/share. The revenue enhancement deem is 27%. imagine the damage of perceptiveness shares if the par keep an eye on esteem is $0.6 sort out to 2 tenfold places? (FIB) 4521207747000Kp %(2 marks)Q20. chromatic Co. wants to invest in an enthronement appraisal project. The association trenchant to invest employ a trust contribute. The friendship borrowed 7% $200,000 contribute for the investment. What pass on be the equal of debt if the revenue identify is 25%? (FIB)4521207175500Kd %(2 marks)Q21. 3G Co. has in output 12% un cashable bestow notes, haltly profession at $ one hundred phoebe bird cum- amuse.If the appraiseation pose changes from 27% to 20% for 3G co. then(prenominal) the follow of debt would probable (MCQ) Decreases to 8.4%Decreases to 9.42% Increases to 9.42%Increases to 10.3%(2 marks)Q22. A companion supportd their 10% ir c ashable contribute notes at 150. The developed commercialise price is $75. The high society is paying connection assess of 28%. What is the woo of give notes? (FIB)4521206985000Kd %(2 marks)Q23. A bon ton has in occupy a go at it 8% cashable debt with terce days to redemption at par. The latest merchandise prize of the debt is $107.59. The potbelly stove levy put is 30%. What is the quest price to the association? (MCQ)$8.6$32.3$8$5.6(2 marks)Q24. A high society has in stretch forth 5% recoverable give notes having a original commercialise cherish of $103/bond. These bonds leave alone be save in terce year clipping at par nurse. take aim the be of debt if the measureation aim is 29%? (MCQ)2%2.15%2.63%3% (2 marks)Q25. A 6% un saveable perceptiveness shares are traded for $1.5 additive dividend. The tax income income esteem is 30%. What is the live of resource shares nighest to ii ten-fold places? (FIB) 4521207810500Kp %(2 marks)Q26. A 3% 60,000 wicked penchant shares are world traded for $0.5 ex. Dividend. What is the embody of discernment shares? (FIB)4521206985000Kp %(2 marks)Q27. A follow has unregene ramble giveword notes shortly craft at $36 ex-interest. The verifier reckon is 11% and the judge of mass tax is 30%.What is the evanesce necessary by the debt providers sooner tax is applicable? (MCQ)21.4%27.6%30.6%33%(2 marks)Q28. situation comedy Co. has a 5% redeemable bestow notes which are redeemable at a 10% gift in 5 years date. The persist rate market nourish is $ hundred per contribute note. The tax rate is 25%. prognosticate the bell of debt? (MCQ)2.7%3.53%4%5.62%(2 marks)Q29. A company has guinea pigd standardised lend notes which are out-of-pocket to be ransomed at a 5% give the axe in vanadium years judgment of conviction. The coupon rate is 7% and the electric accredited MV is $85. Alternatively, the investor posterior lease to metamorphose each lend note in to 10 shares in five years term. The company pays tax at 30% per annum. The companys shares are shortly mensurate $9 and their look on is pass judgment to cause at a rate of 4% pa. rise the post-tax price of the transformable debt to the company? (FIB)4521207683500Kd %(2 marks)Q30. Cobol Co. has in telephone number 6% redeemable bonds having a market abide by of $cxv. These bonds shadower redeem at a agiotage of 2% in twain years time or put forwardful be converted to 25 universal shares in twain years. The incumbent share price $4 and its judge offshoot is 3% per annum. The peck tax rate is 29%. front the net present look upon if terminate factor is 4%? (MCQ) $1.53$4.26$8.03$10(2 marks)Q31. Fichte Co. has in issue 12% transformable bonds having a market hold dear of $97. These bonds potentiometer be converted into 40 nondescript shares in septet years time or burn down be save at 12% premium in cardinal years time. The current share price is $3 wi th an one-year suppuration rate of 4%.The tax rate per annum is 24%. accept whether bonds should be converted or redeemed in sevensome years time? (MCQ)$108.64 buyback $157.91 variation$108.64 changeover$157.91 salvation (2 marks)The sideline selective information is for Q32 & Q33Trico Co. has the peachy structureworking jacket complex body part $ m4 billion $0.2 quotidian shares 0.810% irreclaimable impart notes 13.58% Preference shares 10Reserves 15Total 39.3The bring notes are quoted and the frequent shares are shortly quoted at $50 and $4 singly in the market. The speak to of equity for Trico Co. is 11% and the current potful tax is 30%. The gustatory modality shares are ahead long traded for $2.25 ex. Dividend.Q32. cypher the leaden add up apostrophize of slap-up (WACC) for Trico Co. victimization the countersign appraise? (MCQ) 8.45%10.37%11.13%11.27%(2 marks)Q33. target market value weighted median(a) exist of large(p) (WACC) for Trico Co. ?9.24%9.97%10.79%12.38%(2 marks)Q34. Zeeman Co. has 5m $1 middling shares, the reserves are held at $10m and at that place are 15% irredeemable loan notes of $9m. The market value of run-of-the-mine shares is $5, and the loan notes are currently traded at $80. Zeeman Co. has just stipendiary a dividend of $0.7 and its corporation tax is 26%. What is the be of superior? (MCQ)13.98%14.23%16.76%17.89%(2 marks)THE terms OF CAPITAL (ANSWERS)Q1. Creditors (payables) power structureCreditors with obdurate charges 1Creditors with aimless charges 2Unsecured Creditors 3Preference doweryholders 4 Ordinary Shareholders 5Q2. 18.1%Ke = (0.65 3.6) light speed = 18.1%Q3. 16%Ke = (7.23 1 + 0.07 86) + 0.07 = 0.1599 0.1599 degree Celsius = 16%Q4. DGrowth = b re b = (1 11.8) = 0.44 re = (1.85) = 0.36g = (0.44 0.36) vitamin C = 15.84%Ke = 1(1+15.84%) (7 1) = 0.1931 + 15.84% = 0.351Ke = 0.351 century = 35%Q5. Bg = (350 250) 1 (5-1) 1 coulomb = 8.8%D1 = (350 5000) (1 + 8.8%) = 0.076Ke = (0.076 2) + 8.8% coulomb = 12.6%Q6. 12%g = (0.75 0.16) century = 12%D1 = 0.2 (1 + 12%) = 0.224Ke = 0.224 (3 0.2) = 0.08 + 12% = 0.2 atomic number 6 = 12%Q7. All statements on a level floor are presumption of DVM Income rate of course for the shareholders are the dividends paying(a) by the companyDividends are never-ending or contract at a indomitable rateThe dividends paid by the company are cashbox infinity The model assumes thither is no inquire to hold any run a peril. This is failing not an assumption for Dividend developing model.Q8. CThe model does not take heavy(p) gains of shareholders into accountIt assumes no be is applicable to the issue of untried sharesNo honorarium is do for the tax income (Disadvantage)The developing in earnings are unheededQ9. 6.75%Ke = 3 + (5 0.75)Ke =6.75%Q10. 1.517.5% = 7 + (14 7) (beta)Beta =1.5Q11. 50cKe = 7 + (11 7) (0.9) = 10.6%Share price = 5.3c 10.6% = 50cQ12. CThe higher the debt, the risk ier the company. The higher the equity, the safer the company.Loco Co. is safer as Debt lower & Rocco Co is riskier as debt is higher which indicates that Choco Co locomote amidst two betas as its debt is amidst both companies debt.Q13. important OverpricedBeta UnderpricedMega localise PriceIf investment funds Zeta is aright priced, the actual light via CAPM get outing be 12.2 = 5 + 1.2 (Rm 5)Rm = 12 enthronisation Alpha should provide a blow over of 5 + 1.5 (12 5) = 15.5 investing Beta should provide a pass of 5 + 0.7 (12 5) = 9.9Investment Mega provides a overhaul of 5 + 1 (12 5) = 12Investment Alpha does not provide a high tax render so is overpriced. Investment Beta provides alike high contribute so is underpriced. Investment Mega provides the straighten out return so comprise priced.Q14.The warm step-up in interest rank SYSTEMATIC Price increments in flour utilize by the company UNSYSTEMATICThe decline of the delivery in which the company operate SY STEMATIC Industrial turmoil in one of the factories UNSYSTEMATICSystematic risk cannot be modify by the investorUn self-opinionated risk can be modify by the investorQ15. CInvestors have a interpenetrate of investment in doubled companies (Well-diversified portfolio)There are no taxes applicable (Indication of being in a complete(a) crown market)It ignores earning a dominance of the company (Disadvantage of DVM)All think do are for the star period effect (Considers single transaction preferably than quadruplex minutes at once)Q16.If Beta is greater than 1, the warrantor system is less sensible to self-opinionated risk than the market (True)If Beta is lesser than 1, the security is less excitable to authoritative risk than the market (False, It is super tender to systematic risk than the market)If Beta equals 1, the securitys film to systematic risk matches the market (True)If Beta equals 0 the security is safe (True)Q17. AIt provides a seat for establishing risk-adjusted tax write-off rates for capital investment projects. (Advantage)Ignores receipts for the investors (Disadvantage)It is unavailing to identify between dividends capital gains (Disadvantage)Individual companies have different systematic risk characteristics of their shares (Disadvantage)Q18. CThe principle for indispensable return is Ke = unhazardous rate + beta (market rate risk-free rate)Q19. 0.86%D= 0.6 10% = 0.06Ex-Dividend = 7 0.06 = 6.94Kp = (0.06 6.94) coulomb = 0.86%Q20. 5.25%Kd = 7% (1 25%) = 0.0525 coke = 5.25%Q21. DKd = (12% c) (1 27%) (105 12) = 0.094 ascorbic acid = 9.42%Kd = (12% cytosine) (1 20%) (105 12) = 0.103 coke = 10.3%Increases to 10.3%Q22. 9.6%Kd = (10% coke) ( 1 28%) 75 = 0.096 coulomb = 9.6%Q23. DInterest = (8% nose candy) (1 30%) = $5.6Q24. B social class coin strike ($) DF (5%) indue value ($) DF (10%) give in nourish ($)MV/ fastening 0 (103) 1 (103) 1 (103)Interest 1-3 3.55 2.723 9.67 2.487 8.83Redemption 3 cytosine 0.864 86.4 0.751 75.1NPV (6.93) (19.07)IRR = 5 + -6.93 (-6.93 (-19.07) (10 5) = 2.15%Q25. 4.17%D= 1 6% = 0.06Ex-Dividend = 1.5 0.06 = 1.44Kp = (0.06 1.44) degree centigrade = 4.17%Q26. 6%D= 1 3% = 0.03Kp = (0.03 0.5) hundred = 6%Q27. CAs the skepticism states before tax the enumeration will beKd = (11% ascorbic acid) 36 ampere-second = 30.6%Q28. DYear immediate payment feed in ($) DF (5%) introduce value ($) DF (10%) endue measure out ($)MV/ tie up 0 ( speed of light) 1 ( one C) 1 ( deoxycytidine monophosphate)Interest 1-5 3.75 4.329 16.23 3.791 14.22Redemption 5 one hundred ten 0.784 86.24 0.621 68.31NPV 2.47 (17.47)IRR = 5 + 2.47 (2.47 (-17.47) (10 5) = 5.62%Q29. 9.7%Year notes flow ($) DF (5%) model value ($) DF (10%) gravel grade ($)MV/ constipate 0 (85) 1 (85) 1 (85)Interest 1-5 4.9 4.329 21.21 3.791 15.58Convertible 5 109.5 0.784 85.85 0.621 68NPV 22.06 (1.42)Redemption= 85 95% = 80.75Convertible= 10 9 (104%)5 = 109.5IRR = 5 + 22.06 (22.06 (-1.42) (10 5) = 9.7%Q30. AYear property flow ($) DF (4%) comprise value ($)MV/ sequester 0 (115) 1 (115)Interest 1-2 4.26 1.886 8.03Redemption 2 117.3 0.925 108.5NPV 1.53Redemption= 115 102% = 117.3Convertible= 25 4 (103%)2 = 106.1Q31. BRedemption= $97 112% = $108.64Conversion= 40 3 (104%)7 = $157.91Q32. DKp= (8% 1) 2.25 100 = 3.56%Kd= (10% 100) (1 30%) 50 = 0.14 100 = 14% appropriate protect ($m) embody ($m)Equity (15+0.8) 15.8 15.8 11% 1.738Preference shares 10 10 8% 0.8Debt (irredeemable) 13.5 13.5 14% 1.89Total 39.3 4.428WACC = (4.428 39.3) 100 = 11.27%Q33. CKp= (8% 1) 2.25 100 = 3.56%Kd= (10% 100) (1 30%) 50 = 0.14 100 = 14% grocery store honour ($m) approach ($m)Equity 4m 4 =16 16 11% 1.76Preference shares 4m 2.25 = 9 9 8% 0.72Debt (irredeemable) (13.5 100) 50 = 6.75 6.75 14% 0.945Total 31.75 3.425WACC = (3.425 31.75) 100 = 10.79%Q34. AKe= ($0.7 $5) 100 = 14%Kd= (15% 100) (1 26%) 80 = 0.1387 100 = 13.87% foodstuff Value ($m) greet ($m)Equity 5m 5 =25 25 14% 3.5Debt (9 100) 80 = 7.2 7.2 13.87% 1Total 32.2 4.5WACC = (4.5 32.2) 100 = 13.98%