Duncan plc is financed by 5 million shares of equity with a market capitalisation of £90 million, and debt with a face value and market value of £48 million. The interest rate on the debt is 7% and debt interest is tax deductible. The firm's most recent earnings before interest and tax is £25 million. The corporate tax rate is 20%. There are no market imperfections apart from corporate tax. a) What are Duncan's current earnings per share, share price, and cost of equity (return on equity)? Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to £24 million. The rights price will be at a 25% off the current share price. b) How many new shares must be issued in the rights issue? What will be the new earnings per share? What is Duncan's share price following the rights issue?

Duncan plc is financed by 5 million shares of equity with a market capitalisation of £90 million, and debt with a face value and market value of £48 million. The interest rate on the debt is 7% and debt interest is tax deductible. The firm's most recent earnings before interest and tax is £25 million. The corporate tax rate is 20%. There are no market imperfections apart from corporate tax. a) What are Duncan's current earnings per share, share price, and cost of equity (return on equity)? Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to £24 million. The rights price will be at a 25% off the current share price. b) How many new shares must be issued in the rights issue? What will be the new earnings per share? What is Duncan's share price following the rights issue?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

Purple Inc. has 10 million shares outstanding, now trading at £75 per share. It has also issued £200 million long-term bonds at an interest rate of 8 percent. The firm estimated the expected rate of return for shareholders to be 20 percent in the levered company. a) If there is no corporate tax applicable to this company, what is Purple Inc.’s WACC? b) Now assume Purple Inc. pays tax at a marginal rate of 35 percent. What is the company’s after-tax WACC? c) How much higher would the WACC be if the company used no debt at all? (For this problem you can assume that the firm’s overall asset return is not affected by its capital structure or by interest tax shields).
Shop Right Plc has earnings before interest and tax (EBIT) GHC10 million and there is GHC60 million of debt outstanding with a required rate of return 6.5%. The required rate of return on the industry is 10% and corporate tax is 30%. Assume there are corporate taxes but no personal taxes. Required: 1. Determine the present value of the interest tax shield of Shop Right Plc as well as the total value of the firm 2. Determine the gain from leverage, if personal taxes off 10% on share income and 35% on debt income exists
Napa plc has 100 million £0.25 ordinary shares in issue with a current market value of £1.20 per share. The cost of ordinary shares is estimated at 12 per cent. The business also has 6 per cent irredeemable loan notes in issue with a nominal value of £75 million. These are currently quoted at £80 per £100 nominal value. The tax rate is 20 per cent. What is the weighted average cost of capital of the business?
Kingsford plc possess earnings before interest and tax (EBIT) per year of £30 million. These earnings are predicted to be the same. The market price of the firm's ordinary equity is £1.72 per share cum dividend and the market price of debentures is £70 per debenture ex-interest. An interim dividend of 12 pence per share was announced. Corporate tax rate is 30% and all earnings are paid as dividends. Kingsford's long-term capital structure is as follows: £000 Common equity (50 pence nominal value) 25,000 48,600 73,600 47,394 Reserves 32% debentures 31 December 2017 (£100 nominal value) 120,994 Required: Calculate the cost of capital of Kingsford plc based upon the Traditional Theory of Capital Structure. Assume it is 31 December 2014 now. (b) Dover plc is a firm financed fully with equity. It's market capitalisation is £65 million and possess a cost of capital of 36% per annum. The firm intend to buy back £10 million of shares and replace it with 26% irredeemable loan stock. Dover's…
Mayo plc is financed by 31 million shares of equity with a market çapitalisation of £74.4 million, and debt with a face value and market value of £30 million. The interest rate on the debt is 7.5% and debt interest is tax deductible. The firm's most recent earnings before interest and tax is £16.25 million. The corporate tax rate is 21%. There are no market imperfections apart from corporate tax. a) What are Mayo's current earnings per share, share price, and cost of equity (return on equity)? Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to £15 million. The rights price will be at a 20% discount off the current share price. b) How many new shares must be issued in the rights issue? What will be the new earnings per share? What is Mayo's share price following the rights issue? What is Mayo's cost of equity following the rights issue? Has it changed? Why/why not? What will be the change in wealth for a…
Sunshine Travel has earnings of £18 million of which £6 million is available for either investment or shareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or distribute as a dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required: a) Consider the firm's investment decision from the perspective of pension funds, corporate investors, and retail investors. Discuss which decision is best for each group. b) Sunshine travel has decided to distribute the £6 million to shareholders. Advise Sunshine Travel the choice between paying cash dividends and repurchasing shares.
A company has £350 million of long-term debt in issue paying interest at a rate of 4%, and plans to maintain this level of debt going forward. The marginal tax rate faced by the firm is 25%. Assuming that the company is sufficiently profitable, the present value of the tax shield on interest expense is: a. £84.135m b. £3.365m c. £3.5md. £87.5m
Riccarton Plc has a profit of £250,000 after interest payments of £50,000 and a tax payment of £100,000. The company has long-term borrowings of £450,000, short-term borrowings of £30,000 and equity of £800,000. Riccarton Plc’s Return on Capital Employed (ROCE) is: a) None of the above b) 31.25% c) 32% d) 28%
Two firms, Kit plc and Kat plc, are identical except for their capital structure. Both will earn £300 million in a boom and £100 million in a slump. Kit plc is entirely equity-financed, and therefore shareholders receive the entire income. Its shares are valued at £1 billion. Kat plc has issued £800 million of risk-free debt at an interest rate of 10%, and therefore £80 million of Kat plc income is paid out in interest. There is no taxation and investors can borrow and lend at the risk-free rate of interest. Moreover, you are told that £10 invested in the market portfolio today grows as follows: Today In 1 year £10 £15 (good state) £5 (bad state) a) What is the risk-neutral probability of the good state realisation? What is the value of Kat plc stock? Show all your calculations and comment on your results. b) Suppose that you invest £40 million in Kit plc stock. Is there an alternative investment in Kat plc that would give identical payoffs in both good and bad state…
Sunshine Travel has earnings of £18 million of which £6 million is available for either investment orshareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or distribute as a dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required: a) Consider the firm's investment decision from the perspective of pension funds, corporate investors, and retail investors. Discuss which decision is best for each group.
Barclay Corp is operating in a country K where the corporate tax is 40%, personal income tax on bond investment is 25% while the personal tax on stock is 29%. Assume the firm’s earnings before interest and taxes is $5,400,000 and cost of equity with zero debt is 9%. (Please Show Work) If Barclay current has $12 million total market value of debt financing, what would be the market value of the company of Barclay Corp in this country K?(Please Show Work) What is the proportion of debt (wd) and equity (ws) financing for Barclay Corp with financial leverage? (Please Show Work)
Haricot Corporation and Pinto Corporation both have operating profits of $155 million. Haricot is financed solely by equity, while Pinto has issued $205 million of 5% debt. If the corporate tax rate is 21%:Required:How much tax does each company pay? What is the total payout to investors (debtholders plus shareholders) of each company?

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS