Jay Kay Company has the following capital structure at December 31, 2005 which considered being optimum:...

 

Transcribed Image Text:

Jay Kay Company has the following capital structure at December 31, 2005 which considered being optimum: Amount (Rs.) 300,000 Item 7% Debentures 9% Preferrence Shares (Rs.20 each) Equity (10,000 shares) Question 3: 100.000 600,000 1,000,000 Total The company's shares are selling at a current market price of Rs.23.60 per share. The expected dividend per share next year is 50 % of the 2005 EPS. The following are the earnings per share figures for the company during the preceding ten years. The past trends are expected to continue: Year EPS Year EPS 1996 1.00 2001 1.80 1997 I.12 1.30 2002 2.15 1998 2003 2.40 1999 1.48 2004 2.55 2000 1.62 2005 2.80 The new debentures can be issued at a coupon interest rate of 8%. The company's debenture is currently selling at Rs.96. The new preference issue will fetch a net price of Rs. 20 paying a dividend of Rs.2 per share. The company's marginal tax rate is 50%. Required: Assume that company needs to raise Rs.600.000 next year and its retained earnings are Rs.200,000. Of the total funds intended to be raised, the proportion of equity should be Rs.360,000. Thus the company will have to raise Rs.160,000 by issuing new shares. Assuming that company incurs floatation cost on new equity shares equal to 10%. Remaining amount will be raised through debentures and preference shares in the existing proportion. Caleulate WMCC and revised WACC. Jay Kay Company has the following capital structure at December 31, 2005 which considered being optimum: Amount (Rs.) 300,000 Item 7% Debentures 9% Preferrence Shares (Rs.20 each) Equity (10,000 shares) Question 3: 100.000 600,000 1,000,000 Total The company's shares are selling at a current market price of Rs.23.60 per share. The expected dividend per share next year is 50 % of the 2005 EPS. The following are the earnings per share figures for the company during the preceding ten years. The past trends are expected to continue: Year EPS Year EPS 1996 1.00 2001 1.80 1997 I.12 1.30 2002 2.15 1998 2003 2.40 1999 1.48 2004 2.55 2000 1.62 2005 2.80 The new debentures can be issued at a coupon interest rate of 8%. The company's debenture is currently selling at Rs.96. The new preference issue will fetch a net price of Rs. 20 paying a dividend of Rs.2 per share. The company's marginal tax rate is 50%. Required: Assume that company needs to raise Rs.600.000 next year and its retained earnings are Rs.200,000. Of the total funds intended to be raised, the proportion of equity should be Rs.360,000. Thus the company will have to raise Rs.160,000 by issuing new shares. Assuming that company incurs floatation cost on new equity shares equal to 10%. Remaining amount will be raised through debentures and preference shares in the existing proportion. Caleulate WMCC and revised WACC.

Answer rating: 100% (QA)

The marginal tax rate is the tax charge you pay on a further dollar of income within the America the federal marginal tax charge for individuals will ... View the full answer