There has been much recent volatility within a specific highly technical sector of the electronic components...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
There has been much recent volatility within a specific highly technical sector of the electronic components industry. This industry sector comprises specialist businesses delivering essential components, custom solutions and highly technical servicing support. The industry's operating environment has experienced many changes in recent years, driven by technological developments. This has been both challenging and exciting for those doing business within the environment. Rosehip plc, Sage plc and Peppermint plc all operate within this industry. Rosehip and Sage are the focus of question 4. The focus of question 5 concerns a decision- making problem of Peppermint. Question 4 Rosehip plc and Sage plc are two companies that are facing the same business risk. They have both experienced significant growth in recent years although the efficiency of the current financial markets is questionable. Rosehip plc had planned to continue the company's growth trend in 2020 but the Covid-19 pandemic has restricted that plan to some extent. However, a favourable climate for borrowing has helped fuel the growth, enabling the management to invest heavily in the one specific sector. Despite rumours that Sage plc were considering a reduction in dividend distribution policy, both Rosehip plc and Sage plc continue to distribute all earnings to their shareholders. Rosehip plc has operating earnings before interest and tax of £104 million per annum. The company is financed by 61 million ordinary shares with a market value of 420p each and by £204 million 10% irredeemable debentures with a current market value of £150 per £100 nominal. Sage plc is financed by 16 million ordinary shares with a market value of 610p each and by £64 million 5% irredeemable debentures currently trading at 75 percent. Sage plc has operating earnings before interest and tax of £27.5 million per annum. Mr Tea is a shareholder in Rosehip plc, with a holding of 12,810 ordinary shares. Mr Tea is thinking of selling his shares in Rosehip plc and buying shares in Sage plc, as he believes he may be able to make a capital gain by doing so. Mr Tea is confident that he is able to borrow or lend at a very competitive rate of interest. The rate of corporation tax is 25%. ₁ Turn over Please note that your response should be structured in a way that provides useful information to the decision-maker. Hence, the marks awarded include those for clear problem introduction, full explanations and critical analysis relevant to the finance decision context, not just the computations alone. The following should be included within your response: (a) (b) (i) Derive the various after tax costs of finance and the overall weighted average cost of capital for both Rosehip plc and Sage plc. 30 marks (ii) Mr Tea has asked for your advice as he wishes to switch his investment from Rosehip plc to Sage plc but retain his investment profile. Carefully explain showing all calculations what actions Mr Tea would have to take in order to achieve this position. Fully explain your answer. Would you advise Mr Tea to go ahead with such a switch? Also, calculate Mr Tea's income position in Rosehip plc and Sage plc both before and after the switch. 50 marks Explain how you would try to estimate the beta factor of a new project with different characteristics to current operations. Discuss the theoretical and practical problems you might encounter. 20 marks There has been much recent volatility within a specific highly technical sector of the electronic components industry. This industry sector comprises specialist businesses delivering essential components, custom solutions and highly technical servicing support. The industry's operating environment has experienced many changes in recent years, driven by technological developments. This has been both challenging and exciting for those doing business within the environment. Rosehip plc, Sage plc and Peppermint plc all operate within this industry. Rosehip and Sage are the focus of question 4. The focus of question 5 concerns a decision- making problem of Peppermint. Question 4 Rosehip plc and Sage plc are two companies that are facing the same business risk. They have both experienced significant growth in recent years although the efficiency of the current financial markets is questionable. Rosehip plc had planned to continue the company's growth trend in 2020 but the Covid-19 pandemic has restricted that plan to some extent. However, a favourable climate for borrowing has helped fuel the growth, enabling the management to invest heavily in the one specific sector. Despite rumours that Sage plc were considering a reduction in dividend distribution policy, both Rosehip plc and Sage plc continue to distribute all earnings to their shareholders. Rosehip plc has operating earnings before interest and tax of £104 million per annum. The company is financed by 61 million ordinary shares with a market value of 420p each and by £204 million 10% irredeemable debentures with a current market value of £150 per £100 nominal. Sage plc is financed by 16 million ordinary shares with a market value of 610p each and by £64 million 5% irredeemable debentures currently trading at 75 percent. Sage plc has operating earnings before interest and tax of £27.5 million per annum. Mr Tea is a shareholder in Rosehip plc, with a holding of 12,810 ordinary shares. Mr Tea is thinking of selling his shares in Rosehip plc and buying shares in Sage plc, as he believes he may be able to make a capital gain by doing so. Mr Tea is confident that he is able to borrow or lend at a very competitive rate of interest. The rate of corporation tax is 25%. ₁ Turn over Please note that your response should be structured in a way that provides useful information to the decision-maker. Hence, the marks awarded include those for clear problem introduction, full explanations and critical analysis relevant to the finance decision context, not just the computations alone. The following should be included within your response: (a) (b) (i) Derive the various after tax costs of finance and the overall weighted average cost of capital for both Rosehip plc and Sage plc. 30 marks (ii) Mr Tea has asked for your advice as he wishes to switch his investment from Rosehip plc to Sage plc but retain his investment profile. Carefully explain showing all calculations what actions Mr Tea would have to take in order to achieve this position. Fully explain your answer. Would you advise Mr Tea to go ahead with such a switch? Also, calculate Mr Tea's income position in Rosehip plc and Sage plc both before and after the switch. 50 marks Explain how you would try to estimate the beta factor of a new project with different characteristics to current operations. Discuss the theoretical and practical problems you might encounter. 20 marks
Expert Answer:
Answer rating: 100% (QA)
A 1 To calculate the aftertax cost of finance for Rosehip plc Cost of equity Dividend per share Market value per shareAssuming a dividend of 22p per shareCost of equity 22p 420p 00524 or 524 Cost of d... View the full answer
Related Book For
International Business and the New Realities
ISBN: 978-0136090984
2nd Edition
Authors: S. Tamer Cavusgil, Gary Knight, John R. Riesenberger
Posted Date:
Students also viewed these law questions
-
There has been much interest in whether industries in the United States are moving from the Northeast and North Central regions to the South and West, motivated by the warmer climate, by lower wages,...
-
There has been much opposition to the Free Trade Area of the Americas (FTAA). For a sampling of arguments against this proposed pact, visit www.globalexchange.org, www.citizenstrade.org , and...
-
There has been much interest in whether the presence of 401(k) pension plans, available to many U.S. workers, increases net savings. The data set 401KSUBS.RAW contains information on net financial...
-
Describe what is meant by the term balanced in the term balanced scorecard method.
-
Venture conducted a survey to determine workers perceptions of the causes of conflict at work. The top three vote-getters were (1) people who talk too loudly on the phone, (2) office gossip, and (3)...
-
Presented below are the components in Veasy Company's income statement. Determine the missing amounts. Sales Revenue (a) 75,000 (b) $108,000 Cost of Goods Sold Gross Profit $28,000 Operating Expenses...
-
One critical-thinking skill is a heightened awareness of the danger of reaching a conclusion prior to acquiring missing information that were it known would have a reasonable probability of altering...
-
Identify the feasible region for the following set of constraints: 0.5A + 0.25B 30 1A + 5B 250 0.25A + 0.5B 50 A, B 0
-
Path for Ampere's law Plane surface Bulging surface A parallel-plate capacitor with plates of radius R is being charged by the current ic. Recall Ampere's Law B.d-po Although there is no current...
-
Find the court decision located at 67 AFTR2d 91-718. a. Which court heard the case? b. Who was the judge(s)? c. Which tax year(s) is in question and in what year was the case decided? d. Which Code...
-
What is rust? Illustrate the formation of rust.
-
30 public class WarmUp{ public static void main(String[] args) { Door door new Door (100.00); House cheapHouse = new House (door); 1 class House{ 2 private Door door; 31 3 32 4 public House (Door...
-
Select two models currently in use in the fire, emergency services, or other public safety discipline. Describe the model, how it is applied, what type of information does it require and does it...
-
What can happen if community leaders lack finance knowledge in the context of community development and investment?
-
The polynomial 8x^(2)-8x+2-5+x is simplified to 8x^(2)-gx-h. What are the value of g and h ?
-
Select 1 or 2 health care leadership challenges and map which leadership functions (operational, entrepreneurial, or enabling) can be used to address them. Brainstorm how complex leadership...
-
construct a graph of the depth of the ocean floor, with oceandepth as the vertical axis and distance between New Jersey andPortugal as the horizontal axis. Do not connect the points on thegraph yet....
-
What are the four types of poultry production systems? Explain each type.
-
1. What are the implications for currency risk of TEK focusing its manufacturing in the United States but generating most of its sales abroad? Competitors like HP and Kodak are more geographically...
-
What is the relationship between inflation, interest rates, and currency values?
-
Suppose you work for a multinational firm and are posted to Bogota, Colombia. After renting a house in a posh neighborhood, you hire a full-time maid to perform household chores, a common practice...
-
If you want to triple your money at an interest rate of 6 percent per year compounded annually, how many years would you have to leave the money in the account? a. 12 years b. 19 years c. 32 years d....
-
Let F be the accumulated sum, P the principal invested, i the annual compound interest rate, and n the number of years. Which of the following correctly relates these quantities? a. F = P(1+in) b. F...
-
If you invest $5,000 three years from now, how much will be in the account 15 years from now if i = 10 percent compounded annually? a. $8,053 b. $15,692 c. $20,886 d. $27,800
Study smarter with the SolutionInn App