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3. Long term capital structure of company KL is given below: Sources of capital Book value ($ 000) Debts 20,000 Preferred stock 5,000 Common stock

3. Long term capital structure of company KL is given below:

Sources of capital Book value ($ 000)

Debts 20,000

Preferred stock 5,000

Common stock 7,500

Reserves (re) 17,500

Total capital 50,000

The interest rate for debt is overall 10%, dividend for common stock is $1.3 and $1.5 for preferred stock per share, respectively. Preferred -and stock price is $10 per share, growth rate is 0.06. Suppose that the average income tax ratio is 25 % and the corporate tax ratio is 20 %, calculate and interpret the WACC of the Company.

4.a. What does it mean, if companys operating cash flow is negative for a particular period and how does it impact the investment and financing activities of a company? Explain briefly.

4.b. Explain briefly, how could a companys change in NWC be negative in a given year. What about net capital spending?

4.c. Is it possible for a company to pay dividends when it has a negative net income for the year? Could this happen in the long run? Explain briefly.

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