Theories of capital structure

AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure

Calculate the cost of debt after tax for a discounted debenture issued by Brown Limited.

Question

c) Ten years ago, Brown Limited issued GH¢2.5 million of 6% discounted debentures at GH¢98 per 100 nominal. The debentures are redeemable in 5 years from now at GH¢2 premium over nominal value. They are currently quoted at GH¢80 per debenture ex-interest. Brown Limited pays corporate tax at the rate of 30%.

You are required to calculate the cost of debt after tax.

(4 marks)

Answer

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Tags: Capital structure, Cost of Debt, Debentures, Taxation
Level: Level 3

Topic: Sources of finance and cost of capital, Theories of capital structure
Series: MAY 2016

AFM – May 2018 – L3 – Q1d – Theories of capital structure

Determining the required rate of return for Lime Spider Ltd’s shares using CAPM.

Question

The market is currently yielding a return of 16% while Treasury bills are yielding 10%. Shares of Lime Spider Ltd have a covariance of 7.5 with the market, while the market has a variance of 4.5.

Required:
Determine the required rate of return for Lime Spider Ltd’s shares

Answer

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Tags: CAPM, Financial management, Required Rate of Return, Share Price
Level: Level 3

Topic: Theories of capital structure
Series: MAY 2018

AFM – May 2018 – L3 – Q1c – Theories of capital structure

Calculating the WACC for different financing options and determining the optimal capital structure.

Question

Paisley Brothers Ltd, a company producing loud paisley shirts, has a net operating income of GH¢20,000 and is faced with the following three options for how to structure its debt and equity:

i) Take no debt and pay shareholders a return of 9%.
ii) Borrow GH¢50,000 at 3% and pay shareholders an increased return of 10%.
iii) Borrow GH¢90,000 at 6% and pay a 13% return to shareholders.

Assuming no taxation and a 100% payout ratio:

Required:
Calculate the Weighted Average Cost of Capital (WACC) for each of the options and determine which method is optimal. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Debt Financing, Equity Financing, Optimal Capital Structure, WACC
Level: Level 3

Topic: Theories of capital structure
Series: MAY 2018

AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure

Calculate the cost of debt after tax for a discounted debenture issued by Brown Limited.

Question

You are required to calculate the cost of debt after tax.

(4 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Capital structure, Cost of Debt, Debentures, Taxation
Level: Level 3

Topic: Sources of finance and cost of capital, Theories of capital structure
Series: MAY 2016

AFM – May 2018 – L3 – Q1d – Theories of capital structure

Determining the required rate of return for Lime Spider Ltd’s shares using CAPM.

Question

The market is currently yielding a return of 16% while Treasury bills are yielding 10%. Shares of Lime Spider Ltd have a covariance of 7.5 with the market, while the market has a variance of 4.5.

Required:
Determine the required rate of return for Lime Spider Ltd’s shares

Answer

Find Related Questions by Tags, levels, etc.

Tags: CAPM, Financial management, Required Rate of Return, Share Price
Level: Level 3

Topic: Theories of capital structure
Series: MAY 2018

AFM – May 2018 – L3 – Q1c – Theories of capital structure

Calculating the WACC for different financing options and determining the optimal capital structure.

Question

Paisley Brothers Ltd, a company producing loud paisley shirts, has a net operating income of GH¢20,000 and is faced with the following three options for how to structure its debt and equity:

i) Take no debt and pay shareholders a return of 9%.
ii) Borrow GH¢50,000 at 3% and pay shareholders an increased return of 10%.
iii) Borrow GH¢90,000 at 6% and pay a 13% return to shareholders.

Assuming no taxation and a 100% payout ratio:

Required:
Calculate the Weighted Average Cost of Capital (WACC) for each of the options and determine which method is optimal. (5 marks)

Answer

Find Related Questions by Tags, levels, etc.

Tags: Debt Financing, Equity Financing, Optimal Capital Structure, WACC
Level: Level 3

Topic: Theories of capital structure
Series: MAY 2018

Topic: Theories of capital structure

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AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure

Calculate the cost of debt after tax for a discounted debenture issued by Brown Limited.

AFM – May 2018 – L3 – Q1d – Theories of capital structure

Determining the required rate of return for Lime Spider Ltd’s shares using CAPM.

AFM – May 2018 – L3 – Q1c – Theories of capital structure

Calculating the WACC for different financing options and determining the optimal capital structure.

AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure

Calculate the cost of debt after tax for a discounted debenture issued by Brown Limited.

AFM – May 2018 – L3 – Q1d – Theories of capital structure

Determining the required rate of return for Lime Spider Ltd’s shares using CAPM.

AFM – May 2018 – L3 – Q1c – Theories of capital structure

Calculating the WACC for different financing options and determining the optimal capital structure.

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AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure

Calculate the cost of debt after tax for a discounted debenture issued by Brown Limited.

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AFM – May 2018 – L3 – Q1d – Theories of capital structure

Determining the required rate of return for Lime Spider Ltd’s shares using CAPM.

You're reporting an error for "AFM – May 2018 – L3 – Q1d – Theories of capital structure"

AFM – May 2018 – L3 – Q1c – Theories of capital structure

Calculating the WACC for different financing options and determining the optimal capital structure.

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AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure

Calculate the cost of debt after tax for a discounted debenture issued by Brown Limited.

You're reporting an error for "AFM – May 2016 – L3 – Q2c – Sources of finance and cost of capital, Theories of capital structure"

AFM – May 2018 – L3 – Q1d – Theories of capital structure

Determining the required rate of return for Lime Spider Ltd’s shares using CAPM.

You're reporting an error for "AFM – May 2018 – L3 – Q1d – Theories of capital structure"

AFM – May 2018 – L3 – Q1c – Theories of capital structure

Calculating the WACC for different financing options and determining the optimal capital structure.

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