QUESTION THREE (a) Mavazi Ltd. is a firm that operates in the textile industry. Over the...

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QUESTION THREE (a) Mavazi Ltd. is a firm that operates in the textile industry. Over the last 5 years, the firm has experienced stiff competition that has significantly reduced its turnover. In order to remain profitable, the firm's management is considering diversifying its operations. This activity will require additional financing of Sh.50 million. The firm's existing capital structure is given as follows: (b) Ordinary share capital (Sh.20 par value) Reserves 11% Debentures (Sh.100 par value) 13% Preference share capital (Sh.15 par value) Additional information: 1. 2. 3. 4. 5. 6. The firm's existing capital structure is considered to be optimal. The firm expects to raise Sh.5 million from internal sources in order to finance this diversification activity. However, new ordinary shares will be issued at Sh.32 per share and incur a floatation cost of Sh.2 per share. The most recent dividend paid by the company was Sh.2.5 per share which is expected to grow at a constant rate of 5% per annum in perpetuity. New 12% redeemable debentures will be issued at Sh.110 each. A floatation cost of Sh.15 per unit will be incurred. The par value of each unit is Sh.100 and the debentures will have a maturity period of 10 years. New 14% irredeemable preference shares will be issued at Sh.90 per share. The par value of each irredeemable preference share is Sh.100. The corporation tax rate applicable is 30%. Required: (i) (ii) (iii) (iv) (v) Sh. "000" 60,000 10,000 20,000 10,000 100,000 The cost of ordinary share capital. The cost of retained profit. (2 marks) (2 marks) After tax cost of new 12% debenture capital. (4 marks) Cost of new 14% preference share capital. (2 marks) Weighted marginal cost of capital (WMCC). (4 marks) Siphony Ltd. borrowed Sh.15,000,000 from Baraka Bank at an annual interest rate of 16% repayable in four equal annual instalments at the end of each year. Required: Prepare a loan amortisation schedule for the company. (6 marks) (Total: 20 marks) QUESTION THREE (a) Mavazi Ltd. is a firm that operates in the textile industry. Over the last 5 years, the firm has experienced stiff competition that has significantly reduced its turnover. In order to remain profitable, the firm's management is considering diversifying its operations. This activity will require additional financing of Sh.50 million. The firm's existing capital structure is given as follows: (b) Ordinary share capital (Sh.20 par value) Reserves 11% Debentures (Sh.100 par value) 13% Preference share capital (Sh.15 par value) Additional information: 1. 2. 3. 4. 5. 6. The firm's existing capital structure is considered to be optimal. The firm expects to raise Sh.5 million from internal sources in order to finance this diversification activity. However, new ordinary shares will be issued at Sh.32 per share and incur a floatation cost of Sh.2 per share. The most recent dividend paid by the company was Sh.2.5 per share which is expected to grow at a constant rate of 5% per annum in perpetuity. New 12% redeemable debentures will be issued at Sh.110 each. A floatation cost of Sh.15 per unit will be incurred. The par value of each unit is Sh.100 and the debentures will have a maturity period of 10 years. New 14% irredeemable preference shares will be issued at Sh.90 per share. The par value of each irredeemable preference share is Sh.100. The corporation tax rate applicable is 30%. Required: (i) (ii) (iii) (iv) (v) Sh. "000" 60,000 10,000 20,000 10,000 100,000 The cost of ordinary share capital. The cost of retained profit. (2 marks) (2 marks) After tax cost of new 12% debenture capital. (4 marks) Cost of new 14% preference share capital. (2 marks) Weighted marginal cost of capital (WMCC). (4 marks) Siphony Ltd. borrowed Sh.15,000,000 from Baraka Bank at an annual interest rate of 16% repayable in four equal annual instalments at the end of each year. Required: Prepare a loan amortisation schedule for the company. (6 marks) (Total: 20 marks)

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Lets address each of the required calculations step by step i The cost of ordinary share capital The cost of ordinary share capital can be calculated ... View the full answer