Jusco Ltd will require $11 million in capital in order to be viable and produce $1...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Jusco Ltd will require $11 million in capital in order to be viable and produce $1 million annual cash flows in perpetuity. The prospective directors suggest that the $11 million is to be raised as a combination of debt and equity. There are three Directors - IT, Sales & Marketing, and Finance. All three Directors are aware of the significance of the cost of capital in the context of the following $11 million funding that needs to be raised. There are two proposals to be considered and assume the tax rate is 30%. Proposal X: The IT Director has proposed the following manner in which the $11 million should be raised as a combination of debt and equity as follows: $2 million debt - the debt should be raised by borrowing from a bank at a fixed rate of 6% per annum. $9 million equity - will be raised from an issue of shares. Shares with a similar systematic risk are currently offering an expected return of 11%. Proposal Y: The Sales & Marketing Director has suggested that a higher level of gearing is required and has proposed the following: The $7 million capital should come from lenders, and the $4 million from equity. The debt holders would require 7% per annum, while equity holders would expect a return of 16% annually. Required: Compute the following: (i) The Weighted Average Cost of Capital (WACC) under Proposal X. а. (ii) The WACC under Proposal Y. b. Critically discuss the benefits and limitations of using the Weighted Average Cost of Capital for investment appraisal. Jusco Ltd will require $11 million in capital in order to be viable and produce $1 million annual cash flows in perpetuity. The prospective directors suggest that the $11 million is to be raised as a combination of debt and equity. There are three Directors - IT, Sales & Marketing, and Finance. All three Directors are aware of the significance of the cost of capital in the context of the following $11 million funding that needs to be raised. There are two proposals to be considered and assume the tax rate is 30%. Proposal X: The IT Director has proposed the following manner in which the $11 million should be raised as a combination of debt and equity as follows: $2 million debt - the debt should be raised by borrowing from a bank at a fixed rate of 6% per annum. $9 million equity - will be raised from an issue of shares. Shares with a similar systematic risk are currently offering an expected return of 11%. Proposal Y: The Sales & Marketing Director has suggested that a higher level of gearing is required and has proposed the following: The $7 million capital should come from lenders, and the $4 million from equity. The debt holders would require 7% per annum, while equity holders would expect a return of 16% annually. Required: Compute the following: (i) The Weighted Average Cost of Capital (WACC) under Proposal X. а. (ii) The WACC under Proposal Y. b. Critically discuss the benefits and limitations of using the Weighted Average Cost of Capital for investment appraisal.
Expert Answer:
Related Book For
Posted Date:
Students also viewed these finance questions
-
Can we consider the RUP model as a combination of incremental development and incremental delivery? Justify your answer
-
Bank 1 can issue five-year CDs at an annual rate of 11 percent fixed or at a variable rate of LIBOR + 2 percent. Bank 2 can issue five-year CDs at an annual fixed rate of 13 percent or at a variable...
-
Bank borrowing has long been the manner by which corporations and governments borrowed funds for short periods. What then, is the advantage over bank borrowing for each of the following? a....
-
Use the Ratio Test to determine the values of x 0 for which each series converges. 00 X 2k 2 k=1 k
-
Bill Fredlund, president of Lincoln Log Construction, is considering placing a bid on a building project. Bill has determined that five tasks would need to be performed to carry out the project....
-
The effect of temperature on fugacity can be represented by (a) \(\left(\frac{\partial \ln f}{\partial P} ight)_{T}=\frac{V T}{R}\) (b) \(\left(\frac{\partial \ln f}{\partial P} ight)_{T}=\frac{V...
-
Jeremy Hawk, accountant for Rainbow International Corp., was injured in an auto accident. Another employee prepared the following income statement for the year ended December 31, 2007: The individual...
-
Giant Jets is a French company that produces jet airplanes for commercial cargo companies. The selling price (in euros) per jet is 1,000,000. Currently the company uses actual volumes to allocate...
-
If you used the adjusted tangible book value method to value AFC, how would you determine the market value of the patent?
-
Furniture Land Inc. is a producer and retailer of high-end custom-designed furniture and uses the contract-based approach to revenue recognition. The company produces only to special order and...
-
Discuss in detail (technical discussion) : 1-The type of Blockchain network used in healthcare 2-The cryptographic algorithms/schemes used by Blockchain in healthcare Add references if possible.
-
You hedged the sale of hogs by selling four contracts and then offsetting four futures contracts. The hedged return was $3.00/cwt. Your broker charged you a total commission of $200. What is your...
-
Due to erratic sales of its sole product-a high-capacity battery for laptop computers-PEM, Incorporated, has been experiencing financial difficulty for some time. The company's contribution format...
-
Size of cache memory is 64Kword and the size of main memory is 64M*8 bit word. Determine the word size of main memory, cache and the main memory address format. Give your answer and explain every...
-
I would like you to share your ideas about how Twitter, the company, can drive high levels of their employee engagement by using technology to improve communication. You can also relate your answers...
-
par value is $1,000 for both bonds. Coupon rate Time to maturity Bond A 4.25% 5 years Bond B. 4.25% 25 years 6.69% 6.69% Required return Required: a. Calculate the values of Bond A and Bond B. (Enter...
-
On 1 January 20X1, YX acquired 55% of RT's equity shares. YX elected to measure non-controlling interests in RT at fair value at acquisition. In the year ended 31 December 20X3, profit for the year...
-
What are technical skills At what level are they most important and why?
-
Consider the 3-year swap in the previous example. Suppose you are the fixed-rate payer in the swap. How much have you overpaid relative to the forward price after the first swap settlement? What is...
-
A $50 stock pays an 8% continuous dividend. The continuously compounded riskfree rate is 6%. a. What is the price of a prepaid forward contract that expires 1 year from today? b. What is the price of...
-
An 8-year bond with 6% annual coupons and a 5.004% yield sells for $106.44 with a Macaulay duration of 6.631864. A 9-year bond has 7% annual coupons with a 5.252% yield and sells for $112.29 with a...
-
Kohl's Corporation operates family oriented department stores that sell moderately priced apparel and housewares. The company reported the following information (adapted) for the three years ending...
-
Morgan Corporation reported the following related to property and equipment (all in millions): From the balance sheets: {Requirements} 1. Draw T-accounts for Property and Equipment and Accumulated...
-
An end-of-period adjusting entry that debits Unearned Revenue will most likely credit which of the following? a. A revenue b. An asset c. An expense d. A liability
Study smarter with the SolutionInn App