Blackstone Ltd is a manufacturer and supplier of specialised equipment used in the mining industry. The...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Blackstone Ltd is a manufacturer and supplier of specialised equipment used in the mining industry. The company's new product development team identified the need for a specialised measuring instrument and the company's executive committee approved the R1.5 million investment required to manufacture this new product. The committee needs to decide whether to finance this project using equity financing or debt financing. Equity financing requires issuing 1 500 000 ordinary shares at R1.00 each. Debt financing will consist of issuing 500 9% unsecured debentures at R1 000 each and a long-term loan bearing an interest rate of 12% per annum. ● The committee will base its decision on the effects of the financing options on the shareholders' return on investment and the earnings per share. The following information is available: Statement of financial position as at 31 December 2022. R . Assets - Non-current assets Current assets Total assets Equity and liabilities - Equity (2 500 000 shares) Liabilities Current liabilities - Trade and other payables Total equity and liabilities ● R7 000 000 R1 250 000 8 250 000 Additional information: The company expects to generate an additional R3.8 million in 2023 from the new product. . 8 000 000 ● 250 000 8 250 000 ●. Excluding the estimated income from the new product, the projected income after interest and tax for 2023 is R6 million. Ordinary shares in issue are 2 500 000. The shareholders require 22% on their investment. The tax rate is 28%. Required: Note: Show all calculations. 1.1. Use the information provided to calculate the company's return on equity for both financing options. (14) Blackstone Ltd is a manufacturer and supplier of specialised equipment used in the mining industry. The company's new product development team identified the need for a specialised measuring instrument and the company's executive committee approved the R1.5 million investment required to manufacture this new product. The committee needs to decide whether to finance this project using equity financing or debt financing. Equity financing requires issuing 1 500 000 ordinary shares at R1.00 each. Debt financing will consist of issuing 500 9% unsecured debentures at R1 000 each and a long-term loan bearing an interest rate of 12% per annum. ● The committee will base its decision on the effects of the financing options on the shareholders' return on investment and the earnings per share. The following information is available: Statement of financial position as at 31 December 2022. R . Assets - Non-current assets Current assets Total assets Equity and liabilities - Equity (2 500 000 shares) Liabilities Current liabilities - Trade and other payables Total equity and liabilities ● R7 000 000 R1 250 000 8 250 000 Additional information: The company expects to generate an additional R3.8 million in 2023 from the new product. . 8 000 000 ● 250 000 8 250 000 ●. Excluding the estimated income from the new product, the projected income after interest and tax for 2023 is R6 million. Ordinary shares in issue are 2 500 000. The shareholders require 22% on their investment. The tax rate is 28%. Required: Note: Show all calculations. 1.1. Use the information provided to calculate the company's return on equity for both financing options. (14)
Expert Answer:
Answer rating: 100% (QA)
The goal here is to calculate the companys return on equity ROE for both financing options equity financing and debt financing To calculate ROE we use ... View the full answer
Related Book For
Modern Advanced Accounting in Canada
ISBN: 978-1259087554
7th edition
Authors: Hilton Murray, Herauf Darrell
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Coated Ltd. (Coated) is a manufacturer and supplier of paints throughout South Africa. The entity has a 31 May- financial yearend. The following is an extract of the Statement of Financial Position...
-
2. Suppose a production technology of a firm is represented as Q(K, L) = A[aK-b + (1 a)L-*] (A > 0; 0 < a < 1; b > -1) Find the marginal productivity of labour and capital for the firm.
-
Jason is unhappy with the performance of his mutual fund. He sells his shares in the current fund and repurchases shares in a similar fund with the same firm. This transaction may not be a taxable...
-
The shelf life, in days, for bottles of a certain prescribed medicine is a random variable having the density function Find the probability that a bottle of this medicine will have a shell life of(a)...
-
The Energy Information Administration records the price of electricity in the United States each month. In one recent month, the average price of electricity was 11.92 cents per kilowatt-hour....
-
The General Social Survey reported that in a sample of 68 men aged 1825, the mean number of hours of television watched per day was 2.76 with a standard deviation of 2.21. In a sample of 72 women...
-
1. Woodbine had petitioned the INS to allow Filipinos as RNs, committing to pay them the same wages, but did not do so. What factors may have led to this failure? 2. Some of the Filipino RNs were...
-
Bonds and interest rates have an inverse connection. Bond prices normally fall when the cost of borrowing money rises (interest rates rise). Similarly, as interest rates fall, the bond price rises....
-
Consider an abatement cost function C(e,)=(abe) 2 /2b, where is the amount of private investment to reduce abatement costs. There are J identical firms. The social damage function is D(E)=dE 2 /2....
-
Silicon wafers are being inspected for faults. The number of faults per wafer is distributed as a Poisson random variable with rate parameter = 4. i. What is the probability of observing 3 or more...
-
What role do institutions such as education, media, and religion play in the reproduction and contestation of social norms, values, and ideologies ?
-
3. (20 points) Consider the composite beam illustrated in fig. 3. The beam is comprised of wood and steel, as shown in the cross-section view, along with the dimensions. Assume that Ewood = 15 GPa...
-
Clink Inc offers a defined contribution plan to its employees. Clink will match 5 0 % of the amount withheld from employees pay up to 6 % . Data from the most recent payroll: Gross Withholding Pay...
-
Assume Orion Iron applies its inventory costing method perpetually at the time of each sale. At the end of the annual accounting period, December 31, the accounting records provided the following...
-
A company A had developed a product named X. And they had a list of potential retail stores agreeing to place the order for product X. According to marketing director, there is a possibility we can...
-
Unsure how the opening balance of 85,575 was calculated, what is the calculation/sum to get to this answer? CA S 608,000 1,303,000 3,464,000 162,000 2,259,000 1,390,000 1,448,000 579,000 2,201,000...
-
Sandcastles, Inc.s management has recently been looking at a proposal to purchase a new brick molding machine. With the new machine, the company would not have to buy bricks. The estimated useful...
-
Why is the amortization of the acquisition differential added back to consolidated net income to compute net cash flow from operating activities in the consolidated cash flow statement?
-
Explain how an acquisition differential from an investment in preferred shares should be reflected in the consolidated financial statements.
-
When the parent company uses the cost method, an adjustment must be made to its retained earnings on consolidation in every year after the year of acquisition. Why is this entry necessary? Why is a...
-
Find the response of the system described in Example 2.1 using Eq. (2.23). Data From Example 2.1:- Equation 2.23:- An undamped single-degree-of-freedom system has a mass of 1 kg and a stiffness of...
-
Find the response of the system described in Problem 2.60 using Eq. (2.23). Data From Problem 2.60:- An undamped single-degree-of-freedom system consists of a mass \(10 \mathrm{~kg}\) and a spring of...
-
A bird of mass \(m=2 \mathrm{~kg}\) sits at the top of a slender vertical branch of a tree as shown in Fig. 2.93. The height of the branch from the trunk of the tree is \(2 \mathrm{~m}\) and the...
Study smarter with the SolutionInn App