Financial management revision question and answer

CPA-Financial-Management-Section-3 Revision kit

Biashara Ltd. has the following capital structure:

The finance manager of Biashara Ltd. has a proposal for a project requiring Sh.45 million. He has proposed the following method of raising the funds:

• Utilise all the existing retained earnings
• Issue ordinary shares at the current market price.
• Issue 100,000 10% preference shares at the current market price of Sh.100 per share which is the same as the par value.

• Issue 10% debentures at the current market price of Sh.1,000 per debenture.

Additional information:
1. Currently, Biashara Ltd. pays a dividend of Sh.5 per share which is expected to grow at the rate of 6% due to increased returns from the intended project. Biashara Ltd.‟s price/earnings (P/E) ratio and earnings per share (EPS) are 5 and Sh.8 respectively.
2. The ordinary shares would be issued at a floatation cost of 10% based in the market price.
3. The debenture par value is Sh.1,000 per debenture.
4. The corporate tax rate is 30%.

Biashara Ltd.‟s weighted average cost of capital (WACC)

(a)     Current Capital Structure

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