Mini-scenario 2 Carlito Manolito SpA (CMS) is a business based in the south of Italy that manufactures and distributes extra virgin olive oil throughout Europe. Its capital structure as reported in its statement of financial position at 31 December 2020 is as follows: Em 24m ordinary shares (500) 12 Retained profits 6 Total equity shareholders' funds 18 10% irredeemable bond 8 The current market prices for CMS shares is 3.00. The bond is trading currently at 120% CMS pays corporate tax at a rate of 25%. The cost of the CMS's equity has been estimated at 10% pa The Board of Directors is considering a major new investment, but the CEO and CFO disagree over the best method of financing this. The CEO argues that the funds should be raised using a 1 for 4 rights issue priced at a 20% discount on the current market price The CFO suggests that a bank loan would be more appropriate as debt is cheaper and, in her opinion, CMS's share price currently undervalues the business Question 1 What is CMS's cost of debt to two decimal places? Show all workings (2 marks) 2. What is CMS's weighted average cost of capital to two decimal places for investment appraisal purposes? Show all workings. (2 marks) What is CMS's financial gearing ratio using market values to two decimal places? Show all workings. (2 marks) Assuming CMS goes ahead with the rights issue, what is the theoretical ex-rights price per share? Show all workings (2 marks) 5 of the government of Italy lowers the rate of corporate taxation to 24% would the cost of debt go up or down? No calculations are required (2 marks) 1. 3. 4. Total 10 marks