Apel Investment Company has GH41,800,000 of interest-bearing bond outstanding. The outstanding bonds have a 11% coupon...

 

 

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Apel Investment Company has GH41,800,000 of interest-bearing bond outstanding. The outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes they could issue new bonds at a premium of 105% that would provide a similar yield to maturity. Also, the company's prepared stock currently stands at GH41,200,000 and trades at GH$60.00 per share. The company pays a dividend of GH43.00 per share. Furthermore, the company's common stock sells for GH$15.00 per share with 200,000 shares in issue. The company has a beta of 1.2, whiles the government's T-Bill has an interest rate of 12%, with a 18% average return on the market. The company's marginal tax rate is 40%. Management is considering investing in a new project, the details of which are as follows: GH 2,000,000.00 Project cost Estimated net profit: Year 1 Year 2 Year 3 Year 4 Year 5 (22,000.00) 192,000.00 300,000.00 270,000.00 180,000.00 Year 3 Year 4 Year 5 Additional information; 300,000.00 270,000.00 180,000.00 Depreciation is based on the straight line method. The estimated residual value of the project at the end of its useful life is GH$400,000. From the above information, you are required to calculate, a. after tax cost of debt (4 marks) (4 marks) (4 marks) (4 marks) b. cost of preferred stock c. cost of equity using the capital asset pricing model d. weight average cost of capital e. Using the net present value method, assess the viability of the proposed project (10 marks) f. Time value of money is the observation that, it is better to receive money sooner than later. Explain two (2) reasons why a cedi today is worth more than a cedi sometime in the future. (4 marks) TOTAL: 30 MARKS Apel Investment Company has GH41,800,000 of interest-bearing bond outstanding. The outstanding bonds have a 11% coupon and a 14% yield to maturity. Management believes they could issue new bonds at a premium of 105% that would provide a similar yield to maturity. Also, the company's prepared stock currently stands at GH41,200,000 and trades at GH$60.00 per share. The company pays a dividend of GH43.00 per share. Furthermore, the company's common stock sells for GH$15.00 per share with 200,000 shares in issue. The company has a beta of 1.2, whiles the government's T-Bill has an interest rate of 12%, with a 18% average return on the market. The company's marginal tax rate is 40%. Management is considering investing in a new project, the details of which are as follows: GH 2,000,000.00 Project cost Estimated net profit: Year 1 Year 2 Year 3 Year 4 Year 5 (22,000.00) 192,000.00 300,000.00 270,000.00 180,000.00 Year 3 Year 4 Year 5 Additional information; 300,000.00 270,000.00 180,000.00 Depreciation is based on the straight line method. The estimated residual value of the project at the end of its useful life is GH$400,000. From the above information, you are required to calculate, a. after tax cost of debt (4 marks) (4 marks) (4 marks) (4 marks) b. cost of preferred stock c. cost of equity using the capital asset pricing model d. weight average cost of capital e. Using the net present value method, assess the viability of the proposed project (10 marks) f. Time value of money is the observation that, it is better to receive money sooner than later. Explain two (2) reasons why a cedi today is worth more than a cedi sometime in the future. (4 marks) TOTAL: 30 MARKS

Answer rating: 100% (QA)

a After tax cost of debt Interest rate on existing bonds 11 Marginal tax rate 40 After tax cost of debt Interest rate x 1 Tax rate 11 x 1 40 11 x 60 6... View the full answer