Applicable tax rate is 30% and all sales are made on credit. Assume a 360 day...
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Applicable tax rate is 30% and all sales are made on credit. Assume a 360 day year. Required: Advise on whether the co. should adopt the new credit policy (10 marks) b) The Rose Water Company expects with some degree of certainty to generate the following net income and to have the following capital expenditures during the next five years (in thousands of dollars): Net income $2,000 Capex $1,000 Capex = Capital expenditure 2 $1,500 $1,500 YEAR 3 $2,500 $2,000 $2,300 $1,500 5 $1,800 $2,000 The company currently has 1 million shares of common stock outstanding and pays annual dividends of $1 per share. i) Determine dividends per share and external financing required in each year if dividend policy is treated as a residual decision. (5 marks) ii) Determine the amounts of external financing that will be necessary in each year if the present annual dividend per share is maintained. (5 marks) QUESTION FOUR a) Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in five years' time. Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The current ordinary share price of Phobis Co is $4.45 and this is expected to grow at a rate of 6-5% per year for the foreseeable future. Phobis Co has a cost of debt of 7% per year. Required: Calculate the following current values for each $100 convertible bond: 1) market value; ii) floor value; (4 marks) (3 marks) iii) Conversion premium per share. (3 marks) b) Discuss whether changing the capital structure of a company can lead to a reduction in its cost of capital and hence to an increase in the value of the company. (10 marks) Applicable tax rate is 30% and all sales are made on credit. Assume a 360 day year. Required: Advise on whether the co. should adopt the new credit policy (10 marks) b) The Rose Water Company expects with some degree of certainty to generate the following net income and to have the following capital expenditures during the next five years (in thousands of dollars): Net income $2,000 Capex $1,000 Capex = Capital expenditure 2 $1,500 $1,500 YEAR 3 $2,500 $2,000 $2,300 $1,500 5 $1,800 $2,000 The company currently has 1 million shares of common stock outstanding and pays annual dividends of $1 per share. i) Determine dividends per share and external financing required in each year if dividend policy is treated as a residual decision. (5 marks) ii) Determine the amounts of external financing that will be necessary in each year if the present annual dividend per share is maintained. (5 marks) QUESTION FOUR a) Phobis Co has in issue 9% bonds which are redeemable at their par value of $100 in five years' time. Alternatively, each bond may be converted on that date into 20 ordinary shares of the company. The current ordinary share price of Phobis Co is $4.45 and this is expected to grow at a rate of 6-5% per year for the foreseeable future. Phobis Co has a cost of debt of 7% per year. Required: Calculate the following current values for each $100 convertible bond: 1) market value; ii) floor value; (4 marks) (3 marks) iii) Conversion premium per share. (3 marks) b) Discuss whether changing the capital structure of a company can lead to a reduction in its cost of capital and hence to an increase in the value of the company. (10 marks)
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Answer rating: 100% (QA)
a To advise on whether the company should adopt the new credit policy we need more information about the new credit policy Specifically we need details about the terms of the credit policy such as the ... View the full answer
Related Book For
Modern Advanced Accounting in Canada
ISBN: 978-1259087554
8th edition
Authors: Hilton Murray, Herauf Darrell
Posted Date:
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