One.

The directors of Surface Investment Limited have appointed you as their financial consultant. They are seeking new project investments and require you to calculate the present cost of capital of the company.

The capital structure is listed below:-

? 2 million ordinary shares, with a par value of 50 cents each, currently trading at R4 per share. The company has a beta () of 1.4, a risk free (Rf) rate of 9% and a return on the market (Rm) of 17%.

? 1 million 13%, R2 preference shares, with a market value of R3 per share.

? R3 million 11%, debentures due in 5 years and the current yield-to-maturity is 8%.

? R900 000 16%. Bank loan, due in January 2021.

? The company also has a general reserve of R3 500 000 and a retained income of R4 000 000.

Additional information:

? The dividend growth of 12% per annum was maintained for the past 4 years. The latest dividend paid was 80 cents per share.

? The company has a tax rate of 30%.

Required:

2.1 Calculate the weighted average cost of capital. Use the Capital Asset Pricing Model to calculate the cost of equity. (19)

2.2 Calculate the cost of equity, using the Gordon Growth Model.

ii.

The directors of CSR Industries have appointed you as their financial consultant. They are seeking new project investments and require you to calculate the present cost of capital of the company. The capital structure is listed below: ? 2 million ordinary shares with a par value of 50 cents each, currently trading at R4 per share. The company has a beta (?) of 1.4, a risk free (Rf) rate of 9% and a return on the market (Rm) of 17%. ? 1.5 million 13%, R2 preference shares, with a market value of R2.5 per share. ? R3 million 11%, debentures due in 5 years and the current yield-to-maturity is 8%. ? R800 000 16%. Bank loan. ? The company also has a general reserve of R3 500 000 and a retained income of R4000 000.

Additional information:

? The dividend growth of 12% per annum was maintained for the past 4 years. The latest dividend paid was 80 cents per share.

? Assume a company tax rate of 30%.

Required:

4.1 Calculate the weighted average cost of capital. Use the Capital Asset Pricing Model to calculate the cost of equity.

4.2 Calculate the cost of equity, using the Gordon Growth Model.

Part B.

FINC615 - Applied Managerial Fnanace

Scenario:

Superior Living, Inc. is a private, domestic U.S. manufacturer of home furniture targeted at U.S. consumers ages 21 to 54 (from first-time apartment renters to empty nesters). The company generates $250 million in revenues from six product lines: outdoor patio, luxury, durable rental, children's furniture, rare woods, and space saver. The company sells its products through a number of retailers and has a solid business reputation with distributors and customers. Superior Living has divisions for each of the product lines, and each division includes sales, marketing, and manufacturing personnel. The other functional areas?human resources, finance, and information technology?support the entire company. You are the vice president of finance, reporting to the chief financial officer (CFO). Your role includes the responsibility for financial analysis and financial reporting. This includes developing financial statements, monitoring performance metrics, educating the senior officer team on key financial decisions, and valuing new business opportunities that are presented to the board of directors. Superior is looking to go public in the next 6 to 8 months with an initial public offering (IPO). In addition, the company is aggressively pursuing new business opportunities, which may include expansion via acquisition and the development and implementation of new product lines. All of this will require the company to manage its finances extremely well. You are the key officer to lead in this responsibility. The CFO has asked you to meet with her to outline the financial plans for the next 12 months. She needs you to develop the three financial statements for the end of the fiscal year, determine the capital investments required for the upcoming year, develop the operating budget, and outline the plan for the IPO. To do you will work closely with the VP of accounting and the head of strategic planning. You know that the next 12 months can determine the long-term success of Superior. The CEO and board of directors have made it clear to you and the CFO that the financial plans for the next year should be based on sound, fundamental financial principles and contain as little risk as possible. Finally, you understand the company very well and know that the division chiefs?the senior vice presidents who lead the product divisions?wield a great deal of power and must agree to financial plans. Many of them have expressed that they will need significant expenditures next year, stating that the "running rate will not be enough," referencing the company's longstanding process of developing expense budgets based on the previous year's expenditures plus a small percentage increase. Furthermore, they all have stated that if a merger should occur, it should be with a product line that compliments their division and is brought under their control.

TASK: 5

After looking at the project and talking with some people that have been around the organization for many years, you recognize that the 10% cost of capital is not reflective of the company's current cost of capital. The head of treasury has assured you that the company can raise debt at 7% in today's market and that if the firm was not going to use the US$4M to invest in the machine for the production plant, it would be invested in some short-term securities yielding 5%.

With this in mind, explain a company's cost of capital and how it is calculated. What is marginal cost of capital and how does it differ from weighted average cost of capital? How do market rates and the company's perceived market risk impact its cost of capital? Assume you are leading a discussion on these elements with the managers and finance personnel.

C..solve.

ucture.com/courses/10846/discussion topics/20050 The standard Federal Reserve (Fed) monetary tools identified in the textbook are still in place, albeit they are less effective than they were in the 20th Century. This is mostly due to the unprecedented actions the Fed took after the financial crisis a decade ago to avoid a Great Depression-like financial meltdown. Fed intervention following the financial crisis was required because the Fed is Congressionally mandated through the Federal Reserve Act of 1978 (and later amendments) to undertake policies directed at simultaneously targeting a low inflation rate (under 3%), maintaining full labor employment (under 5% unemployment), and supporting stable real economic growth (over 3%). This is a tough legislative directive to place on the Fed, particularly when, through the democratic process, we the people may be demanding that the legislative branch of government fulfill conflicting social, judicial and/or military objectives. Hitting on all three cylinders at once almost demands coordination of Reserve and Congressional policies. Problem: The current environment has essentially sterilized the effectiveness of traditional open market operations for targeting the federal funds rate. Historically, when labor market conditions tightened and too much upward pressure was being placed on prices, the Federal Reserve Open Market Committee (FOMC) simply engaged in systematic increases in the federal funds rate through strategic open market. purchases of Treasury securities (short term Treasury Bills, primarily). The desired result was always lower inflation, increased labor unemployment, and slower real economic growth. Do you think that the Fed's current approach to raise the federal funds rate will work this time, particularly given that they are starting at a point where the real growth rate is already below 3 % ? Why or why not? What is different this time? If successful, do you believe the effects on the economy will be similar to what we have normally experienced during previous periods of Fed tightening? Search entries or author Unread BI U A A IEEE HTML Editor