ERS is a medium size family controlled business with the family holding about 50.1% shareholding while...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
ERS is a medium size family controlled business with the family holding about 50.1% shareholding while the remainder is in the hands of outsiders. The oldest son in the family Ethan is both CEO and Chairman of the board. The company is considering a project that would involve investment of K11 million now and would yield gross taxable net cash flows of K3.625m per annum for each of the next five years. The project will raise ERS's debt capacity by K8 million for the duration of the project at an interest rate of 5%. The costs of raising this loan are estimated at K250,000 (gross). The company's existing ungeared cost of equity is 12% and corporation tax is 20% payable one year in arrears. ERS currently has a ratio of 1:2 for market value of debt to market value of equity. Required a) By calculating the APV, recommend whether ERS should accept this project wit the proposed financing. fiture b) The directors of ERS were debating on whether or not to use debt or equity in future financing strategies of the business. The family members however, do not wish to bring in additional equity finance in the firm. This implies that the equity capital will either be raised from issuing shares to outsiders or retained earnings (cutting down dividend). Miguel, the Marketing Director feels that debt financing will be quick and easier to raise due to the availability of company assets to use as collateral. He believes that this option will quicken the implementation of future capital projects. Nathanael, the Human Resources Director feels that debt finance will expose the business to greater risks. The director thinks that equity would be the best option in that they can issue as many shares as possible since they are issuing to outsiders. As a consultant to the family, write a report in which you discuss the current position of the family in the company and the likely impact of their refusal to participate in further equity financing. To be included in the report is your reaction to the views of the two directors (Marketing and Human Resources) who are both family members. ERS is a medium size family controlled business with the family holding about 50.1% shareholding while the remainder is in the hands of outsiders. The oldest son in the family Ethan is both CEO and Chairman of the board. The company is considering a project that would involve investment of K11 million now and would yield gross taxable net cash flows of K3.625m per annum for each of the next five years. The project will raise ERS's debt capacity by K8 million for the duration of the project at an interest rate of 5%. The costs of raising this loan are estimated at K250,000 (gross). The company's existing ungeared cost of equity is 12% and corporation tax is 20% payable one year in arrears. ERS currently has a ratio of 1:2 for market value of debt to market value of equity. Required a) By calculating the APV, recommend whether ERS should accept this project wit the proposed financing. fiture b) The directors of ERS were debating on whether or not to use debt or equity in future financing strategies of the business. The family members however, do not wish to bring in additional equity finance in the firm. This implies that the equity capital will either be raised from issuing shares to outsiders or retained earnings (cutting down dividend). Miguel, the Marketing Director feels that debt financing will be quick and easier to raise due to the availability of company assets to use as collateral. He believes that this option will quicken the implementation of future capital projects. Nathanael, the Human Resources Director feels that debt finance will expose the business to greater risks. The director thinks that equity would be the best option in that they can issue as many shares as possible since they are issuing to outsiders. As a consultant to the family, write a report in which you discuss the current position of the family in the company and the likely impact of their refusal to participate in further equity financing. To be included in the report is your reaction to the views of the two directors (Marketing and Human Resources) who are both family members.
Expert Answer:
Answer rating: 100% (QA)
Answer A calculate APV are APV Present Value of Unlevered Firm Cost of Debt Financing Present Value of Unlevered Firm As the Firm is Unleveredwe will ... View the full answer
Posted Date:
Students also viewed these accounting questions
-
For how many months, at an interest rate of 1% per month, does money have to be invested before it will double in value?
-
A company borrowed $180,000 at an interest rate of 9% compounded annually over six years. The loan will be repaid in installments at the end of each year according to the accompanying repayment...
-
For how many months, at an interest rate of 1% per month, does money have to be invested before it will double in value?
-
Helium gas is throttled steadily from 500 kPa and 70C. Heat is lost from the helium in the amount of 2.5 kJ/kg to the surroundings at 25C and 100 kPa. If the entropy of the helium increases by 0.25...
-
Go to the library or go online and locate material about Confucius. Outline his major ideas. Which seem to be applicable to management in the United States today?
-
The capacitors in the circuit in Figure are initially uncharged. (a) What is the initial value of the battery current when switch S is closed? (b) What is the battery current after a long time? (c)...
-
(a) In Figure 7.5, what is the momentum of the ball during the collision? (b) Is the momentum of the ball constant before, during, and after the collision? If so, why? If not, why not, and for what...
-
Chad Davis, vice president for operations at C&C Sports, is considering different strategies for managing the companys inventory. Earlier in the year, the company implemented a more systematic...
-
a) Explain the following principles of valuation i. Principle of conformity ii. Principle of substitution iii. Principle of highest and best use iv. Principle of supply and demand v. Principle of...
-
You are to examine two flow geometries as depicted in the figure. The flow rate in the main pipe is to be maintained constant and equal to Q in both scenarios. To make the comparison simple, it will...
-
If in 2020: >>US Federal Government Spending is $6 trillion and Tax Revenue is $4 trillion >>GDP is $19trillion >>The National Debt is $21 trillion Calculate 2020 Budget Deficit/Surplus... $ ...
-
Discuss one company that you think is compromising its Strategic success by focusing on too many different customers. What changes do you recommend?
-
How are direct and indirect labour costs distinguished?
-
How are fixed and variable labour costs distinguished?
-
Explain how each of the three brand equity dimensions provide value to the firm. Explain how they provide value to customers.
-
Use the rules of block diagram algebra to find the transfer function of the systems shown in Fig. D3.1(a), (b) and (c). R(s) R(s) 2 S 10 s + 10 (a) 1 s+1 10 2 s +4 Y(s) Y(s)
-
Input, Output and Processing Create a console program named SphereCalc that that calculates both the volume and the area of a sphere, given a radius r. The volume V, and the area A, are calculated by...
-
A statistical study shows that the fraction of television sets of a certain brand that are still in service after x years is given by f (x) = e-0.15x. (a) What fraction of the sets are still in...
-
What is the value of equity at time zero? A. 44,055. B. 77,973. C. 122,027. Mun Hoe Yip is valuing Pure Corporation. Pure is a simple corporation that is going out of business in five years,...
-
Economic income during Year 1 is closest to: A. 23,186. B. 29,287. C. 46,101. Mun Hoe Yip is valuing Pure Corporation. Pure is a simple corporation that is going out of business in five years,...
-
What is EP during Year 1? A. 12,101. B. 6,000. C. 6,000. Mun Hoe Yip is valuing Pure Corporation. Pure is a simple corporation that is going out of business in five years, distributing its income to...
Study smarter with the SolutionInn App