Hypothetical Ltd is planning to raise Rs 20,00,000 additional long-term funds to finance its additional capital...

 

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Hypothetical Ltd is planning to raise Rs 20,00,000 additional long-term funds to finance its additional capital budget of the current year. The debentures of the company are to be sold on a 14 per cent net yield basis to the company, and equity shares to be sold at Rs 50 per share net to the company, are the alternatives being considered by the company. It expects to pay dividend of Rs 5 per share at the end of coming year. The expansion is expected to carry the company to a new, higher risk class. The required rate of return expected from the point of view of the investment community is 16 per cent. (i) Determine the growth rate of the company which the market is anticipating. (ii) On the basis of 8 per cent growth, at what price should the equity share be sold by the company? Ignore dividend tax. (iii) Assuming that the management is anticipating growth rate of only 4 per cent per year, what form of financing would you recommend? Hypothetical Ltd is planning to raise Rs 20,00,000 additional long-term funds to finance its additional capital budget of the current year. The debentures of the company are to be sold on a 14 per cent net yield basis to the company, and equity shares to be sold at Rs 50 per share net to the company, are the alternatives being considered by the company. It expects to pay dividend of Rs 5 per share at the end of coming year. The expansion is expected to carry the company to a new, higher risk class. The required rate of return expected from the point of view of the investment community is 16 per cent. (i) Determine the growth rate of the company which the market is anticipating. (ii) On the basis of 8 per cent growth, at what price should the equity share be sold by the company? Ignore dividend tax. (iii) Assuming that the management is anticipating growth rate of only 4 per cent per year, what form of financing would you recommend?

Answer rating: 100% (QA)

i K 016 Rs 5Rs 50 g 016 010 g or g 016 010 6 per ce... View the full answer