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R.K was recently appointed to the post of investment manager of Masada Ltd. a quoted company. The company has raised Kshs.8, 000,000 through a rights issue. R.K has the task of evaluating two mutually exclusive projects with unequal economic lives. Project X has 7 years and Project Y has 4 years of economic life. Both projects are expected to have zero salvage value. Their expected cash flows are as follows: Project Year 1 2 3 4 5 6 X Cash flows (Kshs.) 2,000,000 2,200,000 2,080,000 2,240,000 2,760,000 3,200,000 Y Cash flows (Kshs.) 4,000,000 3,000,000 4,800,000 800,000 7 3,600,000 The amount raised would be used to finance either of the projects. The company expects to pay a dividend per share of Kshs.6.50 in one year's time. The current market price per share is Kshs.50. Masada Ltd. expects the future earnings to grow by 7% per annum due to the undertaking of either of the projects. Masada Ltd. has no debt capital in its capital structure. Required: (a) The cost of equity of the firm. (b) The Internal Rate of Return (IRR) of the projects. (6 marks) (9 marks). R.K was recently appointed to the post of investment manager of Masada Ltd. a quoted company. The company has raised Kshs.8, 000,000 through a rights issue. R.K has the task of evaluating two mutually exclusive projects with unequal economic lives. Project X has 7 years and Project Y has 4 years of economic life. Both projects are expected to have zero salvage value. Their expected cash flows are as follows: Project Year 1 2 3 4 5 6 X Cash flows (Kshs.) 2,000,000 2,200,000 2,080,000 2,240,000 2,760,000 3,200,000 Y Cash flows (Kshs.) 4,000,000 3,000,000 4,800,000 800,000 7 3,600,000 The amount raised would be used to finance either of the projects. The company expects to pay a dividend per share of Kshs.6.50 in one year's time. The current market price per share is Kshs.50. Masada Ltd. expects the future earnings to grow by 7% per annum due to the undertaking of either of the projects. Masada Ltd. has no debt capital in its capital structure. Required: (a) The cost of equity of the firm. (b) The Internal Rate of Return (IRR) of the projects. (6 marks) (9 marks).
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Principles of Auditing and Other Assurance Services
ISBN: 978-0078025617
19th edition
Authors: Ray Whittington, Kurt Pany
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