Z Ltd needs to raise capital to undertake a new project. If they consider the firm's  shares are currently over-valued by the market they will raise funds by issuing shares . otherwise, they plan to organise a variable rate loan with their investment bank.

The finance officer at Z Ltd has gathered the following information

Current price of Z Ltd's shares is $5.50

Last dividend paid to shareholders was 40c per share

The sales and accounting departments have estimated that earnings (hence dividends) are expected to grow at a healthy rate of 8% pa. however this rate is only expected to be sustainable for the next 3 years. After the 3 years, it is expected that the earning growth rate will decrease to a stable 4% pa, and continue at 4% pa into the foreseeable future

The finance department has estimated that given Z Ltd's beta and their projections of market rate, the appropriate discount rate for Z Ltd's equity is 13% pa

Should Z Ltd raise the required capital by issuing equity?

a. show your calculations using financial calculator

b. show your calculations using formula

Answer rating: 100% (QA)

a Calculations using financial calculator To determine whether Z Ltd should raise the required capital by issuing equity we need to calculate the pres... View the full answer