Question Livertool ple manufactures machine tools. It has issued 2 million ordinary shares, quoted at 168 pence each, and l million 10% secured debentures quoted at par. To finance expansion, the directors of the company want to raise 1 million for additional working capital. Cash flow from trading before interest and tx is currently 1 million per annum. It is expected to rise to 1.3 million per annum if the expansion programme goes ahead. To simplify placing a value on the company's equity, you should assume that:

Answer the question below. Question Livertool plc manufactures machine tools. It has issued 2 million ordinary shares, quoted at 168 pence each, and 1 million 10% secured debentures quoted at par. To finance expansion, the directors of the company want to raise 1 million for additional working capital. Cash flow from trading before interest and tax is currently 1 million per annum. It is expected to rise to 1.3 million per annum if the expansion programme goes ahead. To simplify placing a value on the company's equity, you should assume that: The forecast level of cash flow, and a tax rate of 33%, will continue indefinitely. The required rate of return on the market value of equity, 18% post-tax, will be unaffected by the new financing. There is no difference between taxable profits and cash flow. The company's directors are considering 2 forms of financim-equity via a rights issue at 15% discount to current share price, or 12% unsecured loan stock at par. Required: Calculate for both financing options, the expected Increase in the market value of equity Debt / (Debt + Equity) ratio (c) Weighted average cost of capital Ine (a) (b ) (6 marks) (2 marks) (2 marks) [Total : 10 marks]