Financial management revision question and answer

XYZ Ltd is intending to raise capital to finance a new project. The current M.P.S is Sh.43 cum- div of year 2001 declared but not yet paid. For the part 5 years, the company has paid the following stream of dividends.

Year       1997       1998       1999        2000          2001
D.P.S     1.90        2.25         2.60        2.60           3.00

The existing capital structure of the firm is as follows:
SHS   M
Ordinary share capital                   40
Retained earnings                         35
12% Debenture              Sh.100 par 25
Total                100

The debentures are currently selling at Sh.95 ex-interest. The corporate tax rate is 30%.

Required:
(a) Distinguish between cum-div and ex-div M.P.S.
(b) Compute the ex-div M.P.S
(c) Compute the overall cost of capital. Use dividend growth model to determine the cost of equity.
(d) The company wants to raise additional Sh.20 million as follows: 50% from retained earnings
30% from issue of debentures at the current market value
20% from issue of new ordinary shares with 10% floatation costs
(i) Compute the number of ordinary shares to issue to raise the amount required.
(ii) Compute the marginal cost of capital.
ANSWER
a) Cum-div – MPS reflect information on div. Declared but not yet paid.
Ex-div – MPS exclude information on DPS since shareholders
register has been closed.
b) Cum-div MPS           43
Less year 2001 DPS      (3)
Ex-div MPS                     40

(Visited 22 times, 1 visits today)
Share this on:

Leave a Reply

Your email address will not be published. Required fields are marked *