Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Deja Brew Ltd is considering an expansion of its craft beer range and employed you as a consultant Deja Brew has the following sources of

image text in transcribed

Deja Brew Ltd is considering an expansion of its craft beer range and employed you as a consultant Deja Brew has the following sources of finance on its balance sheet: Financing Type Book Value Bonds - 8.5% p.a, semi-annual coupon, $1,000 face value, 7 years to maturity $185 million Preference shares - 10% annual dividend, face value of $4 $60 million Ordinary shares - issue price of $2 $100 million In addition, you collect the following market information: The current market yield on a Deja Brew bond is 6.52% p.a. Ordinary shares are currently trading at $6.17. The next dividend is expected to be $0.58 in one years' time, and these dividends are expected to grow at 2% p.a. in perpetuity, The preference shares have a current market price of $4.90. The relevant tax rate is 25%. (c) Calculate the total market value and cost of Deja Brew's preferred shares, assuming the company operates within a classical tax system.[2 marks] (d) If Deja Brew is evaluating a new investment project that has the same risk as the company's typical project, what rate should they use to discount the project's after-tax cash flows in a classical tax system? (3 marks) Deja Brew Ltd is considering an expansion of its craft beer range and employed you as a consultant Deja Brew has the following sources of finance on its balance sheet: Financing Type Book Value Bonds - 8.5% p.a, semi-annual coupon, $1,000 face value, 7 years to maturity $185 million Preference shares - 10% annual dividend, face value of $4 $60 million Ordinary shares - issue price of $2 $100 million In addition, you collect the following market information: The current market yield on a Deja Brew bond is 6.52% p.a. Ordinary shares are currently trading at $6.17. The next dividend is expected to be $0.58 in one years' time, and these dividends are expected to grow at 2% p.a. in perpetuity, The preference shares have a current market price of $4.90. The relevant tax rate is 25%. (c) Calculate the total market value and cost of Deja Brew's preferred shares, assuming the company operates within a classical tax system.[2 marks] (d) If Deja Brew is evaluating a new investment project that has the same risk as the company's typical project, what rate should they use to discount the project's after-tax cash flows in a classical tax system

Step by Step Solution

There are 3 Steps involved in it

Step: 1

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

Step: 3

blur-text-image

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

Healthcare Finance An Introduction To Accounting And Financial Management

Authors: Louis C. Gapenski

4th Edition

1567932800, 978-1567932805

More Books

Students also viewed these Finance questions