Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

1. Sam is the owner and managing director of Nice Trading Ltd., a popularSME involved in Importing second hand clothing. The company has recently been

1. Sam is the owner and managing director of Nice Trading Ltd., a popularSME involved in Importing second hand clothing. The company has recently been assessing its capital structure so it can finance its' business growth sustainably. With the help of its accountants, the company has set a target capital structure of 40% ordinary shares, 20% preference shares and the balance as debt finance. Sam's ordinary shareholders expect 15% return, the preference shareholders expect 7% return and the cost of debt is estimated at 8%. The relevant tax rate is 20%.

i. Calculate the WACC for Sam's Trading Ltd. 

ii. Based on your answer in (a) above, briefly outline one decision that can be made by: a. Sam; (0.5mark) b. A potential Investor. 

2. Based on WACC and discussions with his accountant, Sam decides to invest in a new storage container since the existing 15-year container has started giving some minor problems. This new investment will cost Sam's Trading Ltd. $60,000 and is expected to generate after tax-cash flows of $12,000 per year for five years. The new container will be sold at the end of 5 years for $20,000 after tax. Provide relevant calculations to justify whether Sam's Trading Ltd. should invest in this project. 

Step by Step Solution

3.37 Rating (147 Votes )

There are 3 Steps involved in it

Step: 1

1i Weight of Debt 1Weight of EquityWeight of Preferred Stock 14... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image_2

Step: 3

blur-text-image_3

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Cost Accounting A Managerial Emphasis

Authors: Charles T. Horngren, Srikant M.Dater, George Foster, Madhav

13th Edition

8120335643, 136126634, 978-0136126638

More Books

Students also viewed these Accounting questions

Question

Describe three different versions of back flush costing.

Answered: 1 week ago

Question

1.12 Describe the sociocultural perspective on abnormal behavior.

Answered: 1 week ago

Question

1.14 Identify four major objectives of science.

Answered: 1 week ago