Assessment Task – Tutorial Questions Unit Code: HI5002 Unit Name: Finance for Business Assignment: Tutorial Questions 2 Holmes Institute Assignment
Purpose: This assignment is designed to assess your level of knowledge of the key topics covered in this unit
Unit Learning Outcomes Assessed:
1. Identify business financial decisions, and critically analyze their impacts on value, and the nature of the broader financial and regulatory environment in which these decisions are made; |
2. Critically evaluate the role of finance in business and appraise the way corporate managers use financial theory to solve practical problems; |
3. Apply underlying finance theories, concepts, assumptions, limitations and arguments to make corporate finance decisions within real-world constraints. |
Description: Each week students were provided with three tutorial questions of varying degrees of difficulty. These tutorial questions are available in the Tutorial Folder for each week on Blackboard. The Interactive Tutorials are designed to assist students with the process, skills and knowledge to answer the provided tutorial questions. Your task is to answer a selection of tutorial questions for weeks 6 to 10 inclusive and submit these answers in a single document.
The questions to be answered are:
Cotton On Ltd. currently has the following capital structure:
Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years.
Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely.
Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%.
The firm’s marginal tax rate is 30%.
Required:
Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a new equipment. Each project will last 5 years and have no salvage value at the end. The company’s required rate of return for all investment projects is 9%. The cash flows of the projects are provided below.
Project 1 | Project 2 | |
Cost | $175,000 | $185,000 |
Future Cash Flows
Year 1 Year 2 Year 3 Year 4 Year 5 |
76,000
83,000 67,000 65,000 55,000 |
87,000
78,000 69,000 65,000 57,000 |
Required:
Bermuda Cruises issues only common stocks and coupon bonds. The firm has a debt-equity ratio of 0.45. The cost of equity is 17.6 percent.
Required:
What is the pre-tax cost of the company debt if weighted average costs of the company is 13.5% and the firm’s tax rate is 35 percent? (10 marks)
Western Electric has 35,000 ordinary shares outstanding at a price per share of $47 and a rate of return of 13.5%. The firm has 5,000 preference shares paying 7% dividend outstanding at a price of $58 a share. The preferred share has a par value of $100. The outstanding bond has a total face value of $450,000 and currently sells for 102% of face. The pre-tax yield-to-maturity on the bond is 8.49%.
Required:
The Giant Machinery has the current capital structure of 65% equity and 35% debt. Its net income in the current year is $250,000. The company is planning to launch a project that will requires an investment of $175,000 next year. Currently the share of Giant machinery is $25/share.
Required:
Calculate the ex-dividend price tomorrow morning. Assuming the tax on dividend is 15%. (2 marks) c) Little Equipment for Hire is a subsidiary in the Giant Machinery and currently under the liquidation plan due to the severe contraction of operation due to corona virus. The company plans to pay total dividend of $2.5 million now and $ 7.5 million one year from now as a liquidating dividend. The required rate of return for shareholders is 12%. Calculate the current value of the firm’s equity in total and per share if the firm has 1.5 million shares outstanding. (4 marks)
Fill The Form – Get Assignment Help