Preference shares – Page 2

FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

Question

The directors of Jindadi Plc. (JP), an Abuja-based entertainment company, are currently considering the appropriate cost of capital to use in appraising capital investments. It is the policy of the company to assess the financial viability of all capital projects using the net present value criterion.

You have been provided with some financial information about the company.

JP has an equity beta of 1.2, and the ex-dividend market value of the company’s equity is N1 billion. The ex-interest market value of the convertible bonds is N168 million, and the ex-dividend market value of the preference shares is N50 million.

The convertible bonds of JP have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years’ time. The current ordinary share price of JP is expected to increase by 4% per year for the foreseeable future.

The equity risk premium is 5% per year, and the risk-free rate of return is 4% per year. JP pays profit tax at an annual rate of 30% per year.

Required:

a. Calculate the market value after-tax weighted average cost of capital of JP, explaining clearly any assumptions you make. (10 Marks)

b. Discuss why market value weighted average cost of capital is preferred to book value weighted average cost of capital when making investment decisions. (5 Marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Book value, Convertible Bonds, Investment decisions, Market Value, Preference shares, WACC
Level: Level 3

Topic: Cost of capital

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

Question

Akwa Nig. Limited is a private limited company planning to be registered with the Nigeria Exchange Limited (NGX). The company is engaged in the conversion of petrol engines into compressed gas engines.

The following are the transactions of the company in respect of its debts and equity instruments.

Transaction 1:
Akwa Nig. Limited issued 40 million non-redeemable N1 preference shares at par value. Under the terms relating to the preference shares, a dividend is payable on the preference shares only if Akwa Nig. Limited also pays a dividend on its ordinary shares for the same period. (5 Marks)

Transaction 2:
Akwa Nig. Limited entered into a contract with a supplier to buy a significant item of equipment. Under the terms of the agreement, the supplier will receive ordinary shares with an equivalent value of N5 million one year after the equipment is delivered. (5 Marks)

Transaction 3:
The directors of Akwa Nig. Limited, on becoming directors, are required to invest a fixed agreed sum of money in a special class of N1 ordinary shares that only directors hold. Dividend payments on the shares are discretionary and are ratified at the Annual General Meeting (AGM) of the company. When a director’s service contract expires, Akwa Nig. Limited is required to repurchase the shares at their nominal value. (5 Marks)

A senior accountant in your company (Akwa Nig. Limited) has asked for your advice on how the above transactions should be treated in the financial statements of your company in accordance with IAS 32 – Financial Instruments: Presentation.

Required:
Write a memo on the above request, discussing and justifying how each of the transactions should be treated in the financial statements, in accordance with IAS 32 – Financial Instruments: Presentation.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Debt, Equity, Financial instruments, Financial Statements, IAS 32, Preference shares
Level: Level 2

Topic: Financial Instruments (IAS 32, IFRS 9)
Series: MAY 2024

FA – Nov 2012 – L1 – SB – Q3 – Accounting Concepts

Prepare journal entries, ledger accounts, and a revised statement of financial position after the redemption of preference shares.

Question

Josephine Limited has an Authorized share capital of 15,000,000 Ordinary Shares of N1 each and 2,000,000 5% Redeemable Preference Shares of N1 each. The Statement of Financial Position of the company as at 31 December 2010 is as follows:

The preference shares are redeemable at N1.10 per share, and it was decided that they should be redeemed on 2 January 2011. In order to provide the necessary funds for the redemption, the short-term investments were sold for N1,600,000.

Required:
Prepare journal entries, necessary ledger accounts, and the Statement of Financial Position after the transaction has been completed.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial Statements, Preference shares, Redemption, Share Premium
Level: Level 1

Topic: Accounting Concepts
Series: NOV 2012

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

Question

Manu Ltd (Manu) is a private company that prepares financial statements in compliance with International Financial Reporting Standards (IFRSs). Financial statements for the year ended 31 December 2020 are being prepared, and the following transactions occurred.

i) On 1 September 2020, Manu purchased 100,000 ordinary shares on the stock exchange for speculative reasons (making a profit) at a price of GH¢1.20 per share and paid a transaction cost of GH¢1,250. On 31 December 2020, the shares were now trading at GH¢1.32 per share on the stock exchange, and Manu received a dividend of GH¢15,000 on the shares.
(3 marks)

ii) Manu issued GH¢360,000 of redeemable 2% Preference shares at a discount of 14% on 1 January 2020. Issue costs were GH¢5,265. The shares will be redeemed on 31 December 2022 at par. Interest is paid annually in arrears, and the effective interest rate is 8%.
(4 marks)

Required:
In accordance with IFRS 9: Financial Instruments, explain how to account for the above transactions in the statement of profit or loss and statement of financial position for the year ended 31 December 2020.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Financial instruments, Financial Liabilities, IFRS 15, IFRS 9, Preference shares, Revenue Recognition
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: NOV 2021

AFM – Nov 2017 – L3 – Q2 – Sources of finance and cost of capital

Calculation of the cost of capital using the WACC and CAPM methods for a company and discussing when to use the cost of equity or WACC for discounting.

Question

Animal Farm Product Ltd, (AFP), a manufacturer of veterinary medicines for farm animals, wishes to estimate its current cost of capital.

The following figures have been extracted from their most recent accounts:

Other relevant data:

The current market value of AFP’s ordinary shares is GH¢12.50 per share cum-dividend. AFP’s beta is 1.4, the risk-free rate is 3%, and the return on the SEC index (the market proxy) is 8%. An annual dividend of GH¢800,000 is due for payment shortly.
The 8% debentures are irredeemable and are trading at a current market value of GH¢106.00, a GH¢6.00 premium over their issue price of GH¢100.00. Semi-annual interest of GH¢4 million has just been paid on the debentures.
The 6% preference shares are trading at a current market value of GH¢6.00, a GH¢1 above their issue price of GH¢5.00. Interest has just been paid on these preference shares.
There have been no issues or redemptions of ordinary shares or debentures during the past five years, and the corporation tax rate remains at 12.5%. Assume that tax relief on the debenture interest arises at the same time as the interest payment.

Required:

a) Calculate the cost of capital that AFP should use as a discount rate when appraising new marginal investment opportunities. (11 marks)

b) Explain when firms should discount projects using:

The cost of equity;
The WACC instead; and
When should they use neither? You may use the information and your results in part (a) as examples. (6 marks)

c) Discuss what type of covenants might be attached to bonds. (3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Bonds, CAPM, Cost of Capital, Preference shares, WACC
Level: Level 3

Topic: Sources of finance and cost of capital
Series: NOV 2017

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

Question

Additional Information:

The realizable values of the assets are as follows:
- Furniture & Fittings: GH¢27.0m
- Motor Vehicle: GH¢67.5m
- Land & Building: GH¢26.25m
- Stocks: GH¢10.95m
- Debtors: GH¢7.5m
The stated capital of the company is made up as follows:
- 2,000,000 ordinary shares of no par value: GH¢67.5m
- 500,000 15% cumulative preference shares of no par value: GH¢30.0m
The cost of winding up is estimated at GH¢21.3m.
The bank overdraft and 18% debentures are secured by a floating charge on the company’s assets.
The preference dividends and interest on debentures are two years in arrears. However, no provision has been made for these in the financial statement.
The ordinary shareholders have decided to inject GH¢60.0m in consideration for a new issue of equity shares if the capital reconstruction scheme is accepted.
Although it is the company’s policy to amortize intangible assets over five years, the Board of Directors has decided to maintain the Goodwill indefinitely in the books due to the persistent losses, in contravention of the company’s policy. Goodwill has been outstanding since 2009. The current financial state of the company negates the value and existence of the goodwill.
The preference shareholders have indicated their willingness to bear any deficit resulting from the reconstruction in proportion to their interest in the stated capital. In return, their stake would be converted into equity, and they would be permitted to make nominations to key management positions, including chairing the board for the first five years. If these proposals are accepted, the preference shareholders will contribute further equity of GH¢60.0m. They have also agreed to waive 50% of the arrears of dividend and convert the rest into equity.
Any arrears of preference dividends are to form a first charge upon any surplus on winding up.
The original ordinary shareholders have decided to waive any dividend due to them during the first two years in order to put the company on sound financial ground.
The company is expected to improve its cash flow position and commence dividend payments if the additional capital of GH¢120.0m is introduced.

Required:
a) Calculate the amount available if Crave Cottage Industry Limited is liquidated and its distribution.

(7 marks)
b) Calculate the maximum possible loss of Crave Cottage Industry Limited and its allocation to Preference Share Capital and Ordinary Share Capital. (6 marks)
c) Calculate the Bank/Cash balance of Crave Cottage Industry Limited after the reorganization. (2 marks)
d) Calculate the new stated capital for the company after the reorganization. (2 marks)
e) Prepare a Statement of Financial Position of Crave Cottage Industry Limited showing the position immediately after the scheme has been put in place.

(3 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital structure, Loss Allocation, Ordinary Shares, Preference shares, Shareholders
Level: Level 3

Topic: Business reorganisation, Corporate reconstruction and reorganisation
Series: MAY 2016

BCL – Nov 2018 – L1 – Q4a – Company Law

Explain three privileges available to shareholders with cumulative preference shares.

Question

Explain THREE (3) privileges available to shareholders/members of a company limited by shares with cumulative preference shares. (12 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Company Law, Dividends, Preference shares, Shareholder Privileges, Winding-up
Level: Level 1

Topic: Contract Law
Series: NOV 2018

BCL – July 2023 – L1 – Q5b – Types of Capital and the Financing of Companies

Distinguish between equity shares and preference shares in three ways.

Question

In THREE (3) ways, distinguish between equity shares and preference shares. (6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Corporate finance, Equity Shares, Preference shares, Shareholder Rights
Level: Level 1

Topic: Types of capital and the financing of companies
Series: JULY 2023

FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

Question

Boom Ltd is into the provision of online conference call facilities which has become popular due to the rising trend in Covid-19 cases in Ghana. The company has 10 million issued shares currently at GH¢50 each, 3 million preference shares trading at GH¢25 each, and 5,000 bonds also trading at GH¢600 each.

Required:
i) Calculate the Capital Structure of the Company. (4 marks)
ii) How much should the company earn annually to achieve a return of 25% per annum on capital employed for equity holders if the dividend rate on preference shares per annum is 20% and the coupon on the bonds is 18%? In Ghana, interest paid on debt is tax deductible and corporate tax is at 25%. (6 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Bonds, Capital structure, Cost of Capital, Equity, Preference shares, Return on Capital Employed
Level: Level 2

Topic: Capital structure
Series: APR 2022

FM – MAY 2018 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Involves the calculation of the cost of various sources of capital, the weighted average cost of capital (WACC), and the net present value (NPV) of a proposed project, as well as an explanation of transaction and economic exposures and methods of mitigating transaction exposure.

Question

a) Okechukwu Ltd is financed by three types of capital:

i) 1 million 50p ordinary shares each having a current market value of GH¢5.20 cum div. The current dividend, which is due to be paid shortly, is 20p per share. The dividend has grown steadily in the past at a compound annual rate of 15% and is generally expected to continue doing so indefinitely.
ii) 200,000 GH¢1 irredeemable 8% preference shares, each having a current market value of 50p ex div.
iii) GH¢2 million 10% debentures, redeemable in 20 years at a price of 110. The current market value is 80 ex int.

Okechukwu is considering a new project having the same risk characteristics as existing projects, which would require an immediate outlay of GH¢150,000 and would produce annual net cash inflow of GH¢30,000 indefinitely.

Required:

Evaluate the viability of the new project using appropriate computations.
(15 marks)

b) Foreign currency risk can be managed to reduce or eliminate the risk. Measures to reduce currency risk are known as hedging.

Required:

i) Explain Transaction and Economic Exposure.
(5 marks)

ii) Explain FIVE ways of mitigating transaction exposure.
(5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Cost of Equity, Debentures, Economic Exposure, NPV, Preference shares, Transaction Exposure, WACC
Level: Level 2

Topic: Cost of capital, Introduction to Investment Appraisal
Series: MAY 2018

FM – MAY 2019 – L2 – Q2a – Capital structure

Calculate the current market capitalization of M&E Ltd and the Weighted Average Cost of Capital (WACC) prior to financing a new project.

Question

Question:
M&E Ltd, recognized as the leader in steel manufacturing, has received an invitation to supply steel for the construction of rail lines to connect the ECOWAS countries, starting from Nigeria. The contract will be for 10 years, and management is considering appraising the investment to enable them to present their proposals for the contract. The following information was extracted from the recently published accounts of M&E Ltd:

	GH¢ ‘000
Equity Shares (1,000,000 shares)	70,000
15% Preference shares	50,000
10% (Bonds irredeemable)	30,000
Total	150,000

The Treasury unit of M&E Ltd has estimated that it will require GH¢ 10 million to finance the new project. The total amount would be raised through 10% Irredeemable bonds at the current market price. The cost of Preference shares and Bonds will not change, but equity shareholders will demand an increase of 20% on the current cost of equity.

M&E Ltd has a beta of 0.8, the market risk premium for the steel industry is 6.25%, and the Government of Ghana Bond rate is 20%. The current market price for Irredeemable Bonds of GH¢1,000 nominal value is GH¢850.

M&E Ltd’s dividend policy is to pay constant dividends, and this policy will not change in the foreseeable future. The recent dividend paid was GH¢20 per share. M&E Ltd is a Free Zones Company and therefore pays tax at a rate of 8%.

Required:

i) Calculate the current market capitalization of M&E Ltd. (5 marks)

ii) Calculate the Weighted Average Cost of Capital (WACC) prior to the consideration of the finance for the proposed project. (9 marks)

(Total: 14 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Beta, Bonds, Equity, Market capitalization, Market risk premium, Preference shares, Weighted Average Cost of Capital (WACC)
Level: Level 2

Topic: Capital structure
Series: MAY 2019

Question Tag: Preference shares

Filter by Professional Bodies

Filter by Subject

Filter by Series

Filter by Topics

Filter by Levels

FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

FA – Nov 2012 – L1 – SB – Q3 – Accounting Concepts

Prepare journal entries, ledger accounts, and a revised statement of financial position after the redemption of preference shares.

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

AFM – Nov 2017 – L3 – Q2 – Sources of finance and cost of capital

Calculation of the cost of capital using the WACC and CAPM methods for a company and discussing when to use the cost of equity or WACC for discounting.

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

BCL – Nov 2018 – L1 – Q4a – Company Law

Explain three privileges available to shareholders with cumulative preference shares.

BCL – July 2023 – L1 – Q5b – Types of Capital and the Financing of Companies

Distinguish between equity shares and preference shares in three ways.

FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

FM – MAY 2018 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Involves the calculation of the cost of various sources of capital, the weighted average cost of capital (WACC), and the net present value (NPV) of a proposed project, as well as an explanation of transaction and economic exposures and methods of mitigating transaction exposure.

FM – MAY 2019 – L2 – Q2a – Capital structure

Calculate the current market capitalization of M&E Ltd and the Weighted Average Cost of Capital (WACC) prior to financing a new project.

Our offerings

Contact Info

Customer

Get In Touch

Question Tag: Preference shares

Filter by Professional Bodies

Filter by Subject

Filter by Series

Filter by Topics

Filter by Levels

FM – May 2022 – L3 – Q5 – Cost of Capital

Calculate market value WACC for JP and discuss its preference over book value WACC for investment appraisals.

You're reporting an error for "FM – May 2022 – L3 – Q5 – Cost of Capital"

FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)

Discuss how to treat transactions of debt and equity instruments in Akwa Nig. Limited under IAS 32.

You're reporting an error for "FR – May 2024 – L2 – SB – Q6 – Financial Instruments (IAS 32)"

FA – Nov 2012 – L1 – SB – Q3 – Accounting Concepts

Prepare journal entries, ledger accounts, and a revised statement of financial position after the redemption of preference shares.

You're reporting an error for "FA – Nov 2012 – L1 – SB – Q3 – Accounting Concepts"

FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications

This question deals with the application of IFRS 9 in financial instruments and the recognition of revenue under IFRS 15.

You're reporting an error for "FR – Nov 2021 – L2 – Q2a – Financial Reporting Standards and Their Applications"

AFM – Nov 2017 – L3 – Q2 – Sources of finance and cost of capital

Calculation of the cost of capital using the WACC and CAPM methods for a company and discussing when to use the cost of equity or WACC for discounting.

You're reporting an error for "AFM – Nov 2017 – L3 – Q2 – Sources of finance and cost of capital"

AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization

Calculate the maximum possible loss of the company and allocate it between preference and ordinary shareholders.

You're reporting an error for "AFM – May 2016 – L3 – Q5 – Corporate Reconstruction and Reorganisation, Business reorganization"

BCL – Nov 2018 – L1 – Q4a – Company Law

Explain three privileges available to shareholders with cumulative preference shares.

You're reporting an error for "BCL – Nov 2018 – L1 – Q4a – Company Law"

BCL – July 2023 – L1 – Q5b – Types of Capital and the Financing of Companies

Distinguish between equity shares and preference shares in three ways.

You're reporting an error for "BCL – July 2023 – L1 – Q5b – Types of Capital and the Financing of Companies"

FM – April 2022 – L2 – Q1b – Capital structure

Calculate the capital structure of Boom Ltd and determine the earnings required to achieve a 25% return for equity holders.

You're reporting an error for "FM – April 2022 – L2 – Q1b – Capital structure"

FM – MAY 2018 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal

Involves the calculation of the cost of various sources of capital, the weighted average cost of capital (WACC), and the net present value (NPV) of a proposed project, as well as an explanation of transaction and economic exposures and methods of mitigating transaction exposure.

You're reporting an error for "FM – MAY 2018 – L2 – Q3 – Cost of capital | Introduction to Investment Appraisal"

FM – MAY 2019 – L2 – Q2a – Capital structure

Calculate the current market capitalization of M&E Ltd and the Weighted Average Cost of Capital (WACC) prior to financing a new project.

You're reporting an error for "FM – MAY 2019 – L2 – Q2a – Capital structure"

Our offerings

Contact Info

Customer

Get In Touch

admin