Question: SECTION A COMPULSORY Question One The following information relates to a company listed on Luse-Mungwi PLC ZMK Million issued share capital (1000 shares) Share

SECTION A COMPULSORY Question One The following information relates to a company

SECTION A COMPULSORY Question One The following information relates to a company listed on Luse-Mungwi PLC ZMK Million issued share capital (1000 shares) Share premium Reserves Share holders funds 6% Irredeemable Debentures 9% Redeemable Debentures Bank Loan Total Long Term Liabilities 4000 2600 290 6.890 2 800 2900 1.000 6 700 The current cum interest market value per K100 unit is K103 and K105 for the 6% and 9% debentures respectively. The 9% debenture is redeemable at par in 10 years time. The bank loan bears interest rate of 2% above the base rate (current base rate is 15%). The current ex-div market price of shares is K1, 100 and a dividend of K100 per share which is expected to grow at a rate of 5% per year has just been paid. The effective corporation tax rate for Mungwi is 30% Required: A) Calculate the effective after tax Weighted Average Cost of Capital (WACC) for Mungwi PLC (20marks) B) Using the traditional theory of capital structure explain what would happen if the company took on additional debt finance. (10marks)

Step by Step Solution

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

A Weighted Average Cost of Capital WACC for Mungwi PLC Total Equity 3800 290 890 5080 Total Debt 290... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Accounting Questions!

The following information relates to Martinez Company for fiscal 2011. Beginning retained earnings ......... $5,100,000 Ending retained earnings .......... 4,100,000 Net income for 2011 ..............

The following information relates to a capital lease between Bradford Electric Co. (lessee) and Widstoe Manufacturing Inc. (lessor). The lease term began on January 1, 2011. Widstoe recorded the...

The following information relates to Helena Limited: Required: Calculate the following accounting ratios for each of the five years from 30 April 2008 to 2012 inclusive: (a) Gross profit (b) Mark-up...

What are the three types of risk that are relevant in capital budgeting? 2. How is each of these risk types measured, and how do they relate to one another? MINI CASE Shrieves Casting Company is...

What are stock dividends and stock splits? What are the advantages and disadvantages of stock dividends and stock splits? MINI CASE Southeastern Steel Company (SSC) was formed 5 years ago to exploit...

Statement of Stockholders Equity Refer to all of the facts in Problem 11-1A. Peeler Company was incorporated as a new business on January 1, 2010. The corporate charter approved on that date...

Grady Leasing Company signs an agreement on January 1, 2010, to lease equipment to Azure Company. The following information relates to this agreement. 1. The term of the non-cancelable lease is 5...

Statement and Note Disclosure, LCM, and Purchase Commitment Maddox Specialty Company, a division of Lost World Inc., manufactures three models of gear shift components for bicycles that are sold to...

Im not sure we should lay out $500,000 for that automated welding machine, said Jim Alder, president of the Superior Equipment Company. Thats a lot of money, and it would cost us $80,000 for software...

Micks Photographic Equipment began operation on January 1, 2011. During 2011, the company entered into the following transactions: 1. Issued 50,000 shares of $15 par value common stock for $30 per...

Suppose that Papa Bell, Inc.s, equity is currently selling for $55 per share, with 4 million shares outstanding. If the firm also has 17 thousand bonds outstanding, which are selling at 94 percent of...

What does it mean to say that a database displays both entity integrity and referential integrity?

Which of the following withdrawal ( i . e . , decumulation after retiring from full - time work ) strategies leads to a portiolio lasting the longest? 2 . Last - in First - out ( LIFO ) strategy ( Le...

HARDA Fashion sells ready-to-wear fashion clothes to teenagers. The company has a 20-store chain concentrated in the north-eastern part of the United States of America. Each store has the experienced...

Arches Manufacturing had always made its components in-house. However, Canyonlands Component Works had recently offered to supply one component, DA, at a price of $52 each. Arches uses 12,500 units...

Signaling and/or free cash flow hypothesis are two of possible hypotheses explaining empirical evidence of financial events. List corporate financial decisions explaining empirical findings. Answer...

Two kilos of rotenone are mixed into a lake which has a volume of 100 x 20 x 2 = 4000 cubic meters. A stream of clean water flows into the lake at a rate of 1000 cubic meters per day. Assume that it...

Consider a person age 40 who wins a $X-lottery and elects to receive payments of 1,000 at the beginning of each year for 10 years certain and continuous thereafter for life. Given that A40 = 0.30 A50...

Managers should not necessarily focus their efforts on raw retention metrics because... (check all that apply) Group of answer choices The metrics could falsely indicate that their retention...

Subsidiary Company S has $1,000,000 of bonds outstanding at 8% annual interest. The bonds have 10 years to maturity. If the parent, Company P, is able to purchase the bonds at a price that reflects...

Ziegler, Nolan, and Petersen are partners in a residential construction business that has operated for the last 32 years in the Los Angeles area. The partners have decided to leave the business and...

Record the following endowment activity events of Private University: 1. An alumnus donates $250,000 to the endowment fund. The cash is fully invested in bonds with a face value of $242,000 that are...

How are the various costs that comprise cost of goods sold reflected in a "type of expenditure" format income statement?

Five factors are often mentioned as affecting a country's accounting practices: (a) legal system, (b) taxation, (c) providers of financing, (d) inflation, and (e) political and economic ties....

Cultural dimension index scores developed by Hofstede for six countries are reported in the following table: Required: Using Gray's hypothesis relating culture to the accounting value of secrecy,...