Question 1

Calet plc pays corporation tax at 30 per cent and has the following capital structure:

Ordinary shares: 1,000,000 ordinary shares of nominal value 25p per share and market value of 79p per share. A dividend of 6p per share has just been paid and dividends are expected to grow by 5 per cent per year for the foreseeable future.

Preference shares: 250,000 preference shares of nominal value 50p per share and market value of 42p per share, The annual net dividend of 7.5 per cent has just been paid.

Bonds: 100,000 of 7 per cent irredeemable bonds with a market price of 102 per 100 nominal. The annual interest payment has just been made.

Calculate the weighted average after-tax cost of capital of Calet plc.

Question 2

Thompson Ltd projects its sales for the next year to be $4,000,000. It expects to earn 5% of that amount after taxes. Thompson is now in the process of projecting its financing needs. The company has made the following assumptions:

i)Current assets are equal to 20% of sales.

ii)Fixed assets are to remain at their current level of $1000,000.

iii)Common equity is currently at $0.80 million.

iv)Thompson pays out half of its after-tax earnings in dividends.

v)The company has short-term payable and trade credit that equal to 10% of sales.

vi)The company has no long-term debt outstanding.

Required:

a)Calculate Thompson Ltd.'s financing needs for the coming year.

b)Distinguish between a firm's three components of its overall planning process:

i. The short-term operating financial plan.

ii. The long-term operating financial plan and the strategic plan.