hello i am having A hard time getting answers to this questions....if you could please help me!!

ACCOUNTING AND FINANCE DEPARTMENT ACC208 - Corporate Finance Individual Assignment SEMESTER 2 2016 DUE: 2pm Friday 7 October 2016 Weight: - 15% Please read the questions carefully before answering them. This is an individual student assignment and therefore, all students are advised to do this assignment individually. Please note that students found copying from other student's assignment work will be awarded a zero (0) mark. This assignment consists of three questions. QUESTION 1 - CAPITAL STRUCTURE Bula Textiles has an ordinary-share capital structure. The selected financial data for the company are shown below: Ordinary shares outstanding Ordinary share price Expected level of EBIT Dividend payout ratio = 2,000,000 = $10 per share = $5,000,000 = 100% In answering the following questions, assume that company income is not taxed. Required: a) Under the present capital structure, what is the total value of the company? b) What is the cost of ordinary share capital? c) Suppose that Bula Textile sells $1 million of long-term debt with an interest rate of 8%. The proceeds are used to retire the ordinary shares. What will be the company's cost of ordinary equity after the capital structure change? (i) What will be the dividend per share flowing to the company's ordinary shareholders? (ii) By what percentage has the dividend per share changed as a result of the capital-structure change? (iii) By what percentage has the cost of ordinary equity changed as a result of the capitalstructure change? (iv) What will be the cost of capital after the capital-structure change? Please show your calculation QUESTION 2 - DEBT & FINANCING MIX The financial data for three companies and the industry are shown in the following table: Measure Debt ratio Times interest covered Price-earnings ratio Company A 20% 11 times 12 times Company B 15% 9 times 10 times Company C 35% 6 times 5 times Industry norm 25% 9 times 10 times Required: a) Which company appears to be using too much debt in its financing mix? Please explain your answer. b) Which company appears to be employing debt to the most appropriate degree? Please explain your answer. c) What explanation can you provide for the higher price-earnings ratio enjoyed by firm B as compared to firm A? Please explain your answer. 1 QUESTION 3 - RELEVANT CASF FLOWS PART A - RELEVANT CASH FLOWS Bula Herbs Ltd is a growing cosmetic company whose products are made solely from botanical ingredients. Due to the rapid expansion, Bula Herbs Ltd is considering the introduction of a new facial product called Bula Softening Cream. This expansion is based on a market study conducted six months ago at a cost of $50,000. The production of this new product will use up floor space which Bula Herbs currently rents out for $60,000 annually. Annual sales revenue is currently $25 million and the introduction of the new product is expected to boost annual sales by $1.5 million a year. Nevertheless, the new product will to some extent overlap existing products' sales, reducing them by 0.5% annually. Currently, the production of each beauty product is overseen by a product manager who is paid $65,000 per year. Cost of sales is 40% of the selling price. Due to the introduction of the new product, the consultants will have to undergo retraining which will cost the company $10,000 per consultant. In addition, new plant and equipment must be purchased costing $500,000 and requiring maintenance costing $70,000 every second year. An old machine that has a salvage value of $100,000 will be converted to use on the new line as a back-up for times when production of the new cream is struggling to meet capacity. The manager of one of the other product lines will be transferred to the new line, in order to bring experience to the activity. The new product is expected to have a six-year effective life, after which the firm thinks it will have to phase it out or re-invest to give it a new lease of life. In addition to the divisional manager, the introduction of the Bula Softening Cream will require the employment of seven beauty consultants who each paid $45,000 per annum, one of whom is currently working for another product line and would otherwise have made redundant and received a 'payout' of $45,000. Required: 1) Determine the initial outlay to start up this project (i.e. year 'zero') 2) What are the annual cash flows in years 1 to 6? 3) Prepare a time diagram showing the net annual cash flows over the life of the project PART B - RELEVANT CASH FLOWS - WORKING CAPITAL REQUIREMENTS After conducting the cash-flow estimations in Part A above, the finance manager of Bula Herbs Ltd has explained to the divisional manager that the analysis is incomplete because working-capital effects were overlooked. The company works to a standard that specifies that each $1,000 of annual sales must be backed up by holdings of $200 of inventories, supplied by creditors who require to be paid monthly. In addition, 90% of sales are on credit terms, the resultant accounts receivable being collected monthly. Required: 1) How much must the company tie up in (i) inventory and (ii) accounts receivable? 2) What is the effect of the accounts payable? 3) Recalculate the net annual cash flows 4) If the required rate of return is 14%, determine if the project should go ahead or not? ADDITIONAL NOTES: Please submit your assignments through the Moodle prior or by 2pm Friday 7 October 2016. Note that your assignment MUST have a proper cover page, with your name and student ID on it. Please show all calculations. Marks will be deducted for no show of calculations and equations. 2