Manny Co is a listed company that plans to spend K10m on expanding its existing business....

 

 

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Manny Co is a listed company that plans to spend K10m on expanding its existing business. It has been suggested that the money could be raised by issuing 9% loan notes redeemable in ten years' time. Current financial information on Manny Co is as follows. Income statement intormation for the last year KO00 Profit before interest and tax 7,000 Interest (500) Profit before tax 6,500 Tax (1,950) Profit for the period 4,550 Balance sheet for the last year KO00 KO00 Nan-current assets 20,000 Current assets 20.000 Total assets 40.000 Equity and liabilities Ordinary shares, par value 5,000 Retained earnings 22.500 Total equity 27,500 10% loan notes 5,000 9% preference shares, par vakue 2.500 Total non-current liabilities 7,500 Current liabilities 5.000 Total equity and liabilities 40.000 The current ex div ordinary share price is K450 per share. An ordinary dividend of K35 per share has just been paid and dividends are expected to increase by 4% per year for the foreseeable future. The current ex div preference share price is K76. The loan notes are secured on the existing non-current assets of Manny Co and are redeemable at par in eight years' time. They have a current ex interest market price of K105 per K100 loan note. Manny Co pays tax on profits at an annual rate of 30%. The expansion of business is expected to increase profit before interest and tax by 12% in the first year. Manny Co has no overdraft. Average sector ratios: Financial gearing: 45% (prior charge capital divided by equity capital on a book value basis) Interest coverage ratio: 12 times Required: (a) Calculate the current weighted average cost of capital of Manny Co. Using Market Values and Book Values (10 marks) (b) Discuss whether financial management theory suggests that Manny Co can reduce its weighted average cost of capital to a minimum level. (5 marks) Assume that the dividend growth rate of 4% is unchanged. Manny Co is a listed company that plans to spend K10m on expanding its existing business. It has been suggested that the money could be raised by issuing 9% loan notes redeemable in ten years' time. Current financial information on Manny Co is as follows. Income statement intormation for the last year KO00 Profit before interest and tax 7,000 Interest (500) Profit before tax 6,500 Tax (1,950) Profit for the period 4,550 Balance sheet for the last year KO00 KO00 Nan-current assets 20,000 Current assets 20.000 Total assets 40.000 Equity and liabilities Ordinary shares, par value 5,000 Retained earnings 22.500 Total equity 27,500 10% loan notes 5,000 9% preference shares, par vakue 2.500 Total non-current liabilities 7,500 Current liabilities 5.000 Total equity and liabilities 40.000 The current ex div ordinary share price is K450 per share. An ordinary dividend of K35 per share has just been paid and dividends are expected to increase by 4% per year for the foreseeable future. The current ex div preference share price is K76. The loan notes are secured on the existing non-current assets of Manny Co and are redeemable at par in eight years' time. They have a current ex interest market price of K105 per K100 loan note. Manny Co pays tax on profits at an annual rate of 30%. The expansion of business is expected to increase profit before interest and tax by 12% in the first year. Manny Co has no overdraft. Average sector ratios: Financial gearing: 45% (prior charge capital divided by equity capital on a book value basis) Interest coverage ratio: 12 times Required: (a) Calculate the current weighted average cost of capital of Manny Co. Using Market Values and Book Values (10 marks) (b) Discuss whether financial management theory suggests that Manny Co can reduce its weighted average cost of capital to a minimum level. (5 marks) Assume that the dividend growth rate of 4% is unchanged.

Answer rating: 100% (QA)

Calculating WACC Market value of equity 5m x 450 225k Market value of preference shares 25m x 0762 ... View the full answer