SBS company is planning an asset to purchase a machine that cost 1,500,000.00. The company is...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
SBS company is planning an asset to purchase a machine that cost 1,500,000.00. The company is considering the financing of the purchase. The choice that is open either an all-equity financing or a mixture of debt and equity. Currently, deposits in commercial banks provide a risk-free rate of return at 4%. Stock market analyst is of the opinion that the market is expected to provide a return of 20%. Companies in the same industry with no financing through debt has a beta of 0.7. The average share price of companies in the industry is RM 3 per share. The corporate tax rate is 30%. The bond market indicates that issuing bonds at RM 250,000 will cost the company 10% coupon rate. Amount of bonds at RM 500,000 will be charged with a 10.5% coupon rate. The company is analysing the situation with 2 alternative of bonds issues for amount of RM 250,000 and RM 500,000. Another alternative is to use financing with 100% equity. The company expects the earnings before interest and tax (EBIT) in the following scenarios. EBIT 300,000.00 325,000.00 350,000.00 Probability 0.333 0.333 0.333 Prepare an analysis of each of the financing alternatives that is available for the company. Analysis must include the cost of capital of each alternative, scenario analysis of each alternative earning per share (EPS), and the contribution of the machine on the economic value of the company. Give your recommendation on the best alternative the company should take. Required: Prepare an analysis of each of the financing alternatives that is available for the company. a. Cost of Capital for each alternative. SBS company is planning an asset to purchase a machine that cost 1,500,000.00. The company is considering the financing of the purchase. The choice that is open either an all-equity financing or a mixture of debt and equity. Currently, deposits in commercial banks provide a risk-free rate of return at 4%. Stock market analyst is of the opinion that the market is expected to provide a return of 20%. Companies in the same industry with no financing through debt has a beta of 0.7. The average share price of companies in the industry is RM 3 per share. The corporate tax rate is 30%. The bond market indicates that issuing bonds at RM 250,000 will cost the company 10% coupon rate. Amount of bonds at RM 500,000 will be charged with a 10.5% coupon rate. The company is analysing the situation with 2 alternative of bonds issues for amount of RM 250,000 and RM 500,000. Another alternative is to use financing with 100% equity. The company expects the earnings before interest and tax (EBIT) in the following scenarios. EBIT 300,000.00 325,000.00 350,000.00 Probability 0.333 0.333 0.333 Prepare an analysis of each of the financing alternatives that is available for the company. Analysis must include the cost of capital of each alternative, scenario analysis of each alternative earning per share (EPS), and the contribution of the machine on the economic value of the company. Give your recommendation on the best alternative the company should take. Required: Prepare an analysis of each of the financing alternatives that is available for the company. a. Cost of Capital for each alternative.
Expert Answer:
Answer rating: 100% (QA)
Solution Cost of machine 1500000 a Option All equity firarung 1 Cost of ... View the full answer
Related Book For
Contemporary Financial Management
ISBN: 9780324289114
10th Edition
Authors: James R Mcguigan, R Charles Moyer, William J Kretlow
Posted Date:
Students also viewed these finance questions
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Planning is one of the most important management functions in any business. A front office managers first step in planning should involve determine the departments goals. Planning also includes...
-
The Crazy Eddie fraud may appear smaller and gentler than the massive billion-dollar frauds exposed in recent times, such as Bernie Madoffs Ponzi scheme, frauds in the subprime mortgage market, the...
-
Find the dy/dx for the following 3 2x+1.2x+1 (x +1)4 1- y=-
-
In 1990, General Electric acquired Tungsram Ltd., a Hungarian light bulb manufacturer. Hungary's inflation rate was 28% in 1990 and 35% in 1991, while the forint (Hungary's currency) was devalued 5%...
-
What is SCOR, and what purpose does it serve?
-
Regulation can no longer be viewed simply in terms of command and control over companies. Discuss two alternatives to direct regulation and explain, by using the notion of an enforcement pyramid,...
-
After the tangible assets have been adjusted to current market prices, the capital accounts of Brandon Newman and Latrell Osbourne have balances of $75,000 and $125,000, respectively. Juan Rivas is...
-
4.Red Company uses normal costing. During the year ended December 31, 2019, the following information were made available: - Total manufacturing costs incurred during the year, P2,200,000; - Cost of...
-
At a local university, the Student Commission on Programming and Entertainment (SCOPE) is preparing to host its first rock concert of the school year. To successfully produce this rock concert, SCOPE...
-
A California man who had a long history of mental illness with multiple inpatient psychiatric admissions stabbed his mother to death. He was found not guilty of murder by reason of insanity. Can the...
-
Q-1 Given that ELC's discount rate is 0.7 percent, what is the present value of future lease payments upon lease commencement? (in thousands of dollars) $760 $777 $1,001 $870
-
Goering Eye Care is a small firm with excellent growth opportunities. Goering's sales in 2017 were $2 million. Sales are expected to grow 10% in 2018. At the end of 2017 Goering's total assets were...
-
Given the 80% learning rate, What is the total contract price for the 8 satellites? (Include the 25% markup on cost in the contract price)
-
During the months of November and December 2014, Comfy Home had the following transactions related to holiday candles: November 1, 2014 purchased 200 candles for $5 each Between November 2-30, 2014 ...
-
ABC Corporation is considering the acquisition of JLK Corporation. ABC has 760,000,000 shares of stock, with earnings per share of $6.70 and a market price per share of $78. JLK has 350,000,000...
-
Given the data below, reproduce and fill in the table in your answer, graph the results on appropriate graphs. Assume firm has only labor as a resource/input. L Wage Bill Total Resource Cost MRC MRP...
-
An auto-parts manufacturer is considering establishing an engineering computing center. This center will be equipped with three engineering workstations each of which would cost $25,000 and have a...
-
Is the shareholder wealth maximization goal a short- or long-term goal? Explain your answer.
-
Show algebraically that Equation 14.2: Is equivalent to Equation14.1: Sales Variable costs EBIT DOL at X EBIT/EBIT DOL at XASales/Sales
-
Describe how certainty equivalent cash flow estimates can be derived for individual project cash flows.
-
Derive an expression for the time at which the response of a critically damped system will attain its maximum value. Also find the expression for the maximum response.
-
A simple pendulum is found to vibrate at a frequency of \(0.5 \mathrm{~Hz}\) in a vacuum and \(0.45 \mathrm{~Hz}\) in a viscous fluid medium. Find the damping constant, assuming the mass of the bob...
-
A heavy disk of mass moment of inertia \(J\) is attached at the middle of a circular shaft of length \(l\) and diameter \(d\) as shown in Fig. 2.113. By modeling the system as a...
Study smarter with the SolutionInn App