QUESTION 1 ABC Company Ltd., which is effectively controlled by the Zulu family although they own...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
QUESTION 1 ABC Company Ltd., which is effectively controlled by the Zulu family although they own only a minority of shares, is to undertake a substantial new project which requires external finance of about K400 million, leading to a 40% increase in gross assets. The project is to develop and market a new product and is fairly risky. About 70% of the funds required will be spent on land and buildings. The resale value of the land and buildings is expected to remain equal to or greater than, the initial purchase price. Expenditure during the development period of the first 4 to 7 years will be financed from other revenue of ABC Company Ltd. This will have a consequent strain on the company's overall liquidity If, after the development stage, the project proves unsuccessful, then the project will be terminated and its assets sold. If, as is likely, the development is successful, the project assets will be utilized in production and company's profit will rise considerably. However, if the project proves to be very successful, then additional finance may be required to further expand the production facilities. At present, ABC Company Ltd. is all equity financed. The financial manager is uncertain whether he should seek funds from the public in the form of common stock, preferred stock or bonds. Required: (a) Describe the major factors to be considered by ABC Company Ltd. in deciding on the method of financing the proposed expansion project. (10 marks) (b) Briefly discuss the suitability of equity, preferred stock and bonds for the purpose of financing the project from the point of view of: (i) ABC Company Ltd. (ii) The provider of finance. (iii) Clearly state and justify the type of finance recommended for ABC Ltd. (5) (5) (5) QUESTION 1 ABC Company Ltd., which is effectively controlled by the Zulu family although they own only a minority of shares, is to undertake a substantial new project which requires external finance of about K400 million, leading to a 40% increase in gross assets. The project is to develop and market a new product and is fairly risky. About 70% of the funds required will be spent on land and buildings. The resale value of the land and buildings is expected to remain equal to or greater than, the initial purchase price. Expenditure during the development period of the first 4 to 7 years will be financed from other revenue of ABC Company Ltd. This will have a consequent strain on the company's overall liquidity If, after the development stage, the project proves unsuccessful, then the project will be terminated and its assets sold. If, as is likely, the development is successful, the project assets will be utilized in production and company's profit will rise considerably. However, if the project proves to be very successful, then additional finance may be required to further expand the production facilities. At present, ABC Company Ltd. is all equity financed. The financial manager is uncertain whether he should seek funds from the public in the form of common stock, preferred stock or bonds. Required: (a) Describe the major factors to be considered by ABC Company Ltd. in deciding on the method of financing the proposed expansion project. (10 marks) (b) Briefly discuss the suitability of equity, preferred stock and bonds for the purpose of financing the project from the point of view of: (i) ABC Company Ltd. (ii) The provider of finance. (iii) Clearly state and justify the type of finance recommended for ABC Ltd. (5) (5) (5)
Expert Answer:
Answer rating: 100% (QA)
Part 1 There are several factors that ABC Company Ltd should consider when deciding on the method of financing the proposed expansion project The most ... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
What follows are the liabilities and shareholders equity sections of the balance sheets for Kao Corp. and Bennington Corp. Each has assets totalling $4.2 million. At year end, the market price of...
-
Situation 1 Espino Company has the following stock outstanding: Common Stock Preferred Stock 100,000 shares 9,000 shares s0.50 par value s20 par, $2 dividend The amount available for dividends this...
-
The following information pertains to Ming Corp. at January 1, 2018: Common stock, $10 par, 50,000 shares authorized, 3,000 shares issued and outstanding Paid-in capital in excess of par, common...
-
What is the time value of money? Including present and future value. How would a financial expert interpret it?
-
For a direct-mapped cache, a main memory address is viewed as consisting of three fields. List and define the three fields.
-
Two experienced managers are resisting the introduction of a computerized exponential smoothing system, claiming that their judgmental forecasts are much better than any computer could do. Their past...
-
Increasingly, we are seeing email used in cases involving defendants located in foreign countries. Plaintiffs filed suit against four Defendants: Qingdao Sunflare New Energy Co., Skone Lighting Co.,...
-
Kitchen Help Inc. (KHI) is a manufacturer of toaster ovens. To improve control over operations, the president of KHI wants to begin using a flexible budgeting system, rather than use only the current...
-
Introduction : provide the reader a bulleted list of all the points your will discuss in the presentation. Database Management Systems: identify some basic concepts associated with database...
-
You are a finance consultant who specializes in planning, analytics, and management accounting for startups and growing businesses. A new company, Sweet & Sour Pvt. Ltd., approaches you to...
-
You are supposed to attend a meeting tomorrow. Overnight, you have a family emergency. What should you do? Explain your answer.
-
How far would my pumpkin travel horizontally before falling 6.9 meters if the acceleration is 9.8 m/s the time is 1.91 seconds the force is 17.738 N and it's speed is 3.61 m/s and the mass is 1.81 kg.
-
5. On October 14th, you cashed your paycheck of $112.00 and deposited $93.00 in your checking account and $20.00 in your savings account. Make out the deposit slip for your checking account, enter...
-
Provide an explanation of both a two-dimensional array as well as a three-dimensional array. Following your explanation of these two arrays, discuss the differences that exist between these two....
-
In a study, mosquitoes were divided into four groups of seven mosquitoes each: infected rhesus and sporozites present (Trt 1), infective rhesus and oocysts present (Trt 2), infective rhesus and no...
-
Earley Corporation issued perpetual preferred stock with an 11% annual dividend. The stock currently yields 7%, and its par value is $100. Round your answers to the nearest cent. a. What is the...
-
following APA (7 th edition) and manuscript format. Including in-text citations and reference. What is the problem? Traffic congestion and the roads are in terrible conditions, with potholing...
-
Willingness to pay as a measure of a person's value for a particular good measures the maximum a person would be willing to pay requires that payment actually be made depends on the satisfaction that...
-
Kenseth Corp. has the following beginning-of-the-year present values for its projected benefit obligation and market-related values for its pension plan assets. The average remaining service life per...
-
In early January 2011, Reymont Corporation applied for a trade name, incurring legal costs of $18,000. In January 2012, Reymont incurred $7,800 of legal fees in a successful defense of its trade...
-
Parnevik Company has the following securities in its investment portfolio on December 31, 2012 (all securities were purchased in 2012): (1) 3,000 shares of Anderson Co. common stock which cost...
-
Supply chain management is the management of activities from all organizations involved in producing and delivering a good or service. Describe the supply chain that delivers education at your...
-
Burger King introduced mass customization to its fast-food offerings in the mid-1970s, thus revolutionizing how fast food could be delivered. Today, mass customization is aided by the Internet and...
-
What decision would you make in this situationland or sea?
Study smarter with the SolutionInn App