The ordinary shares of FUSTA Holdings Company Ltd have a par value (aka nominal value) of $0.50 per share, and the current ex div¹ ordinary share price is $6.50 per share. The last dividend paid was $0.55. The dividends paid in most recent years are shown in the table below Year Dividend per share 2017 $0.47 2018 $0.49 2019 $0.51 2020 $0.53 The 5% irredeemable preference shares of FUSTA Holdings Company Ltd have a par value of $1 per share and an ex-div market price of $2.50 per share. The long-term borrowings of FUSTA Holdings Company Ltd consist of $15m bond issue that has a par value of $1,000, a market price of $1,025 and pays an interest of 6%. The flotation cost of the bond issue was $30 per share and the bond is due to mature in the next 5 years. a) The weights (i.e. the proportionate investment) in FUSTA Holdings Ltd capital investment using book values as well as market values. You can use the information in the table shown on table three to calculate the weights. TABLE 3 Number Market (*000) Price Weights based on Market Value Book Weights Value based on ($'000) Book Total Market (d) Value (a) (b) Value ('000) Unit Market price x Total Number of 28,000 $6.50 Units (c) = (a x b) $182,000,000 $14,000 Ordinary Shares (13%) 6,000 Preferenc e Shares (8%) 15 Bonds (4.5%) 1 Ex div means ex dividend, this is the share price after the announcement of the dividend to be paid. This share price excludes the dividend that is to be paid. TOTAL $212,375,000 $35,000 TOPIC 2 (cont'd): SOURCES OF CAPITAL AND COST OF CAPITAL - B) If the company is considering ONLY utilizing its retained earnings to finance an upcoming project what will be the cost of capital? Please provide a brief explanation for your response. C) Provide a brief description of the Weighted Average Cost of Capital and its uses. || An equity analyst has projected the expected returns on the shares of two (2) publicly traded corporations, Eusta Inc. and Fansa Ltd, under three (3) different economic conditions. The probabilities of each economic state were determined by the Central Bank and are shown in Table 2 below. TABLE 2 State of Probabilit Return on Return on Economy y of State FUSTA FANSA Boom .25 0.240 0.300 Stagnant .35 0.040 0.060 Recession .40 -0.100 -0.200 TOPIC 2: SOURCES OF CAPITAL AND COST OF CAPITAL An extract of the financial position of FUSTA Holdings Company Ltd, a company listed on the stock exchange is shown below. The company is subject to a corporation tax rate of 30%. Extract of FUSTA Holdings's Balance Sheet as at 31st December 2021 $m $m Equity and Liabilities Share Capital 20 Retained Earnings 18 TOTAL EQUITY 38 Long-Term Borrowings 15 Current Liabilities 25 TOTAL LIABILITIES 40 78 TOTAL EQUITY & LIABILITIES The share capital of FUSTA Holdings Company Ltd consists of $14m ordinary shares and $6m irredeemable preference shares. The ordinary shares of FUSTA Holdings Company Ltd have a par value (aka nominal value) of $0.50 per share, and the current ex div¹ ordinary share price is $6.50 per share. The last dividend paid was $0.55. The dividends paid in most recent years are shown in the table below Year 2017 2018 Dividend per share $0.47 $0.49 2019 $0.51 2020 $0.53 The 5% irredeemable preference shares of FUSTA Holdings Company Ltd have a par value of $1 per share and an ex-div market price of $2.50 per share.

The ordinary shares of FUSTA Holdings Company Ltd have a par value (aka nominal value) of $0.50 per share, and the current ex div¹ ordinary share price is $6.50 per share. The last dividend paid was $0.55. The dividends paid in most recent years are shown in the table below Year Dividend per share 2017 $0.47 2018 $0.49 2019 $0.51 2020 $0.53 The 5% irredeemable preference shares of FUSTA Holdings Company Ltd have a par value of $1 per share and an ex-div market price of $2.50 per share. The long-term borrowings of FUSTA Holdings Company Ltd consist of $15m bond issue that has a par value of $1,000, a market price of $1,025 and pays an interest of 6%. The flotation cost of the bond issue was $30 per share and the bond is due to mature in the next 5 years. a) The weights (i.e. the proportionate investment) in FUSTA Holdings Ltd capital investment using book values as well as market values. You can use the information in the table shown on table three to calculate the weights. TABLE 3 Number Market (*000) Price Weights based on Market Value Book Weights Value based on ($'000) Book Total Market (d) Value (a) (b) Value ('000) Unit Market price x Total Number of 28,000 $6.50 Units (c) = (a x b) $182,000,000 $14,000 Ordinary Shares (13%) 6,000 Preferenc e Shares (8%) 15 Bonds (4.5%) 1 Ex div means ex dividend, this is the share price after the announcement of the dividend to be paid. This share price excludes the dividend that is to be paid. TOTAL $212,375,000 $35,000 TOPIC 2 (cont'd): SOURCES OF CAPITAL AND COST OF CAPITAL - B) If the company is considering ONLY utilizing its retained earnings to finance an upcoming project what will be the cost of capital? Please provide a brief explanation for your response. C) Provide a brief description of the Weighted Average Cost of Capital and its uses. || An equity analyst has projected the expected returns on the shares of two (2) publicly traded corporations, Eusta Inc. and Fansa Ltd, under three (3) different economic conditions. The probabilities of each economic state were determined by the Central Bank and are shown in Table 2 below. TABLE 2 State of Probabilit Return on Return on Economy y of State FUSTA FANSA Boom .25 0.240 0.300 Stagnant .35 0.040 0.060 Recession .40 -0.100 -0.200 TOPIC 2: SOURCES OF CAPITAL AND COST OF CAPITAL An extract of the financial position of FUSTA Holdings Company Ltd, a company listed on the stock exchange is shown below. The company is subject to a corporation tax rate of 30%. Extract of FUSTA Holdings's Balance Sheet as at 31st December 2021 $m $m Equity and Liabilities Share Capital 20 Retained Earnings 18 TOTAL EQUITY 38 Long-Term Borrowings 15 Current Liabilities 25 TOTAL LIABILITIES 40 78 TOTAL EQUITY & LIABILITIES The share capital of FUSTA Holdings Company Ltd consists of $14m ordinary shares and $6m irredeemable preference shares. The ordinary shares of FUSTA Holdings Company Ltd have a par value (aka nominal value) of $0.50 per share, and the current ex div¹ ordinary share price is $6.50 per share. The last dividend paid was $0.55. The dividends paid in most recent years are shown in the table below Year 2017 2018 Dividend per share $0.47 $0.49 2019 $0.51 2020 $0.53 The 5% irredeemable preference shares of FUSTA Holdings Company Ltd have a par value of $1 per share and an ex-div market price of $2.50 per share.

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter16: Financial Statement Analysis

Section: Chapter Questions

Problem 2MAD

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