(a). The capital structure of Al Kawthar Corporation is built around the financial leverage of 35% against total capitalization of $140,000,000. The foxed asset intensity is around 46%. The corporation is planning to expand its total assets by 20% under the prevailing ROTA of 16%. Before the expansion policy the relationship between b and DPR was built around the ratio 4 to 5 respectively. Under the expansion plan the DPR will be reduced by 10%. Al Kawthar Corp. is operating business in a very short-term finance market in the sense that current liabilities represent 90% of the total liabilities before expansion.

Required:

1. Based on Kunt and Maks Model, develop the financing scenario and expected growth profile of Al Kawthar Corporation.

2. What would be the required external fund if shareholders forgo dividend for the coming five years.

(b). Cairo Corporation is facing financial difficulties in the light of devaluation of the Egyptian pound. The Board of Directors are targeting to maintain zero EPS to get out of the bottleneck. The Corp.’s obligations towards interest on bank borrowing was amounted to $14,500,000 and obligation of interest to bond holders amounted 140% of banking finance cost. Al MENA Corp. joined Cairo Corp. as preference shareholders with the dividend amount as obligation EP 10,500,000. The outstanding common shares are 190,000.

Required:

1. Find out the EBIT that will qualify the Corp. to maintain zero EPS.

2. What would be the EBIT if the obligation to bond holders reduced by 14%?

Answer rating: 100% (QA)

a 1 The expansion policy of Al Kawthar Corporation will lead to an increase in its total assets by 20 This will lead to a decrease in the DPR by 10 Th... View the full answer