Faculty of Higher Education
Assignment Cover Sheet
Unit Code H15002
Unit Name FINANCE FOR BUSINESS
Assignment Number TUTORIAL QUESTIONS 2
Due Date 26 -05-2020
Declaration
Complete this and attach as a front cover sheet to your Blackboard submission
We certify that:
1. This assignment is our own work. We have acknowledged and disclosed any
assistance received in its preparation and cited all sources from which data, ideas,
words (whether quoted directly or paraphrased) were taken.
2. This assignment was prepared specifically for this unit only.
3. The reference list is truthful and accurate and in Harvard referencing style .
Student name/s & ID LECTURER NO OF QUES SUBMITTED
1,2,3,4,5
Table of Contents
Answer to Question 1 (Week 6).................................................................................................2
Part A.....................................................................................................................................2
Part B......................................................................................................................................2
Answer to QuestioN2 (Week 7).................................................................................................4
Part A.....................................................................................................................................4
Answer to Question3 (Week 8)..................................................................................................6
Part A.....................................................................................................................................6
Part B......................................................................................................................................7
Part C......................................................................................................................................7
Answer to Question 4 (Week 9).................................................................................................8
Part A.....................................................................................................................................8
Part B......................................................................................................................................9
Answer to Question 5 (Week 10).............................................................................................10
Part (A).................................................................................................................................11
Part B....................................................................................................................................12
Reference..................................................................................................................................13
ANS TO QUES 1 :
CALCULATION OF PRICE OF DEBT :
PRICE OF BOND = COUPON PAYMENT * {1-(1=YTM)^-N / YTM } + FACE VALUE / (1
+ YTM)
= $100* 7..469444 + $103.668
= $746.944 + 703.6668
= $ 850.611
PART B :
PRICE OF COMMON STOCK = { CURRENT DIVIDENDS / REQUIRED
RETURN *GROWTH RATE
= { $ 8.50 * (1+4%) / 9% - 4% }
= $ 8.84 / 5%
= $176.80
PART C CALCULATION OF PREFFERED STOCK
PRICE OF OREFFERED STOCK = { PREFFERED DIVIDEND / REQUIRED
RETURN }
= { $100 * 12% / 10% }
= { $120 / 10 % }
= $ 120
ANS TO QUES 2 :
A B C D E
REQUIRED 9%
RETURN
INITIAL COST -$175,000 -$185,000
YEAR PROJECT 1 CUMULATIVE PROJECT 2 CUMULATIVE
CASH FLOWS CASH FLOWS
1 $ 76,000 $ 76,000 87000 87000
2 83000 159,000 78000 165,000
3 67,000 226,000 69,000 234,000
4 65,000 291,000 65,000 299,000
5 55,000 346,000 57,000 356,000
NET PRESENT $ 98,114.37 $96,841.94
VALUE
PAYBACK 2.24 2.29
PERIOD
=YEARS
BEFORE FULL
RECOVERY +
UNRECOVERED
COST + NEXT
YEAR CASH
FLOWS
GIVEN NPV , PROJECT 1 SHOULD BE SELECTED AS IT HAS HIGHER NPV .
Additionally PAYBACK PERIOD RULE , PROJECT 1 SHOULD BE SELECTED
BECAUSE THE PAY BACK PERIOD , PROJECT 1 SHOULD BE SELECTED , THERE
IS NO CONFLICT BETEWWEN RULES .
ANS TO QUES 3 :
THE PRE TAX COST CAN BE COMPUTED AS FOLLOWS :
WEIGHTED AVERAGE COST OF CAPITAL = PRETAX COST OF DEBT (1-TAX RATE
) *WEIGHT OF DEBT + COST OF EQUITY *WEIGHT OF EQUITY .
Obligation EQUITY RATIO = 0.45
COST OF EQUITY =17.6
WEIGHTED AVERAGE COST = 13.5%
FIRM TAX RATE = 35 %
0.135 = PRETAX COST OF DEBT (1-0.35) * 0.45/+ 0.176*1/1.45
0.135= PRETAX COST OF DEBT *0.2017 + 0.12137
0.135-0.12137)/0.20172 = PRETAX COST OF DEBT
6.75% APPROXIMATELY = PRETAX COST OF DEBT
ANS TO QUES 4 :
A B C D E F G
PRICE SHARES MARKET WEIGHT RATE WEIGHTED
VALUE RETURNS
DEBT 102% $459,000 19.17% 5.94% 0.0113
PREFFERE $58 5000 $290,000 12.114% 12.07 0.01461
D
STOCK
COMMON 47 35,000 $1,645,00 68.713% 13.50 0.092763158
STOCK 0
TOTAL MARKET VALUE $
2,394,000
WEIGHTED AVERAGE COST OF CAPITAL 11.88%
A B C D E F G
1 PRICE SHARE MARKET WEIGHT RATE WEIGHTE
VALUE D RATE
2 DEBT 1.02 =B2*45000 =D2/E5 =8.49%(1- =E2*F2
0 30%)
3 PREFFERED 58 5000 =B3*C3 =D3/E5 =100*7%/B3 =E3*F3
STOCK
4 COMMON 47 35000 =B4*C4 =D4/E5 0.135 =E4*F4
STOCK
5 TOTAL =D2+D3+D4
MARKET
6 AVERAGE =G2+G3+G4
COST OD
CAPITAL
PART B
WEIGHT OF DEBT $459,000/$2394,000
WEIGHT OF DEBT =0.92
WEIGHT OF PREFFERED STOCK = $290,000/$2,394,000
WEIGHT OF COMMON STOCK = $1,645,000/$2,394,000
= 0.687
PART C
WACC = WEIGHT OF DEBT*AFTER TAX COST OF DEBT + WEIGHT OF
PREFFERED STOCK * COST OF PREFFERED STOCK + WEIGHT OF COMMON
STOCK *COST OF COMMON STOCK
WACC = 0.192*5.943% + 0.121 *12.069% + 0.687*13.50%
WACC=11.88%
ANS TO QUES 5 :
Different sorts of profit arrangements are use by the organizations to decide the
measure of profit that will be paid to investor. Remaining profit strategy is one of them
that is registered subsequent to deducting capital consumptions from the overall gain.
Given information:
Net gain is $250,000
Speculation of $175,000 is required one year from now
Current offer cost is $25 per share
65% of value and 35% of obligation
Estimations:
(a)
Estimation of profit payout proportion according to lingering profit payout
DIVIDEND PAYOUT RATIO = TOTAL AMOUNT LEFT FOR DIVIDEND /NET
INCOMES
= NET INCOME – (INVESTMENT *65%)/NET INCOME
= $250,000 – ( $175,000*0.65) / $ 250,000
= $136,250 / $250,000
= 54.5%
PART B
EX DIVIDEND PRICE
DIVIDEND PER SHARE $ 2.50
TAX ON DIVIDEND 15%
DIVIDEND PER SHARE $2.13 =2.50*(1-
15%)
EX DIVIDEND PRICE $22.88
PART C
VALUE OF LITTLE EQUIPMENT
TOTAL DIVIDEND $ 2,500,000
LIQUIDATING DIVIDEND IN ONE YEAR 7,500,000
RATE OF RETURN 12%
PRESENT VALUE OF LIQUIDATING 6,696,428
DIVIDEND IN ONE YEAR
CURRENT VALUE OF FIRMS $9,196,428
SHARES OUTSTANDING 1,500,000
VALUE PER SHARE $6.13
Ex-dividend price = Share Price before dividend - (Dividend per share * (1-tax rate))
The current value of a firm's equity equals the present value of all future dividends.
Since the company is providing liquidating dividend in year 1, it implies there will be no
future dividends.
REFERENCE :
https://www.investopedia.com/articles/investing/110613/market-value-versus-book-
value.
https://breakingdownfinance.com/finance-topics/finance-basics/ex-dividend-price-formula/
https://www.investopedia.com/ask/answers/how-are-book-value-and-market-value-different/
https://corporatefinanceinstitute.com/resources/knowledge/finance/what-is-wacc-formula/
