28 July 2010

Corporate Finance Assignment

Formative Learning Week 3

The Cost of Capital

Group 1
Tutor Name : Augustine Entonu,

Email: aentonu@lsbf.org.uk

Group Members

1. Stephen Das (Group Leader)

2. Supun
3. Vijay
4. Fida - absent
5. Adeel
6. Ahmed
7. Logithan
8. Jasper
9. Maryam
10. Nisha
11. Naima - absent
12. Muhommad Iqbal
 Droxfol Co. The cost of Equity:

1. Cost of Equit = Ke = do ( 1 + g)
-------------------
= 0.35 ( 1 + 0.04)
Po -------------------

4.50

= 8.09%

2. Cost of Debt:
      9% $ 4% $
Year Description Cash Flow DCF1 PV1 DCF2 PV2
0 MV -105 1 -105 1 -105
1 Int (1-T) 6.3 0.917 5.7771 0.962 6.0606
2 Int (1-T) 6.3 0.842 5.3046 0.925 5.8275
3 Int (1-T) 6.3 0.772 4.8636 0.889 5.6007
4 Int (1-T) 6.3 0.708 4.4604 0.855 5.3865
5 Int (1-T) 6.3 0.65 4.095 0.822 5.1786
6 Int (1-T) 6.3 0.596 3.7548 0.79 4.977
7 Int (1-T) 6.3 0.547 3.4461 0.76 4.788
8 Int (1-T) 6.3 0.502 3.1626 0.731 4.6053
9 Int (1-T) 6.3 0.46 2.898 0.703 4.4289
10 Int (1-T) 6.3 0.422 2.6586 0.676 4.2588
10 RedempV 100 0.422 42.2 0.676 67.6
        -22.3792   13.7119

IRR= LR% +(NPV+$/ NPV+$ - NPV -$ ) x (HR - LR)

IRR = 4% + (13.7119/13.7119-(-22.3792)) x (9-4)

= 5.8999%
 3. A.
Ke = Do/ Po-Do
Ke = .23 / 3.78 - .23 = 6.479%

3. B.
Ke = Do (1+g)/P o

= 0.06 (1+0.04)/0.95

= 0.06 (1.04)/0.95

= 6.5684
C. Do = 178; Dn = 130; n = 4
g = [(Do/Dn)^1/n] – 1
g = 8.1731%
Ke = Do(1+g)/Po
Do = 178; g=8.1731; Po =15%
Ke = 12.8%

d) d. Divend per share = Total Dividend/ Total no. of shares

= 60000/600000 = 0.10 dollars
Ke = Do/Po
= 0.10/ 2.45
= 4.08%

e) Cost of Debt:
 Po = 1.65 – 0.06 = 1.59
Kp = i /Po= 0.06/1.59 = 3.774%

f) Po = 96 – 9 = 87
I=9; T = 0.21

Kd = i(1-T)/Po
Kd= 8.17%

G)

      13%   6%  
Year Description Cash Flow DCF1 PV1 DCF2 PV2
0 MV -106 1 -106 1 -106
1 Int (1-T) 10.27 0.885 9.08895 0.943 9.68461
2 Int (1-T) 10.27 0.783 8.04141 0.89 9.1403
3 Int (1-T) 10.27 0.693 7.11711 0.84 8.6268
4 Int (1-T) 10.27 0.613 6.29551 0.792 8.13384
5 Int (1-T) 10.27 0.543 5.57661 0.747 7.67169
6 Int (1-T) 10.27 0.48 4.9296 0.705 7.24035
6 RedempV 100 0.48 48 0.705 70.5
             
             
             
             
        -16.95081   14.99759
IRR= LR% +(NPV+$/ NPV+$ - NPV -$ ) x (HR - LR)

IRR = 6% + (14.99759/14.99759-(-16.95081)) x (13-6)

= 9.286%

Prospher:
A i)
Do = $650,000/4,000,000 = $0.1625
B = 100%-40% = 60%
ROE= 14%
G = 40% x 14% = 5.6%
Ke = Do (1+g)/Po = (0.1625 x (1+0.056))/1.65
= 0.104=10.4%

A ii) Cost of preference share capital:

Po = 0.5 – (.4 x .07) =

= .472 = i/kp =.4 x .07/ kp
kp = .0593
A iii)
i = 2.5 mil x 6% x (1-28%) = 0.108
Redemption Value= (1+5%) x 2,5 Mill. =
2.625
Po = (.108/1.0792) + (.108 /1.0792^2) +
(.108/1.0792^3) + (.108 /1.0792^4) + (.108 /
1.0792^5) + (.108 +2.625)/1.0792^5)
= 2.225 mil
A iv)
Po = 0.5 – (.4 x .07) =
= .472 = i/kp =.4 x .07/ kp
kp = .0593
Kd = 11% (1-28%) = 7.92%