SAMPLE QUESTION 5 Bonanza Brothers Ltd manufactures leather saddles and has the following capital structure which it considers to be optimal under present and forecast conditions: Type of Finance Debt Equity Total debt and equity Proportion Used 40% 60% 100% For the coming year, the financial manager Hoss Cartwright expects after-tax earnings of $2.4 million. Bonanza Brothers' past dividend policy of paying out 60 per cent of earnings will continue. Present commitments from its banker will allow Bonanza Brothers to borrow further amounts of finance according to the following schedule: Loan Amount $0 to $750,000 $750,001 and above Interest Rate 9% 11% Bonanza Brothers' taxation rate is 40 per cent. The current market price of its shares is $4.80. Its most recent dividend was $0.46 per share, and the expected growth rate in dividends is a constant 5 per cent per annum. External equity can be sold at a flotation cost of 10 of the amount raised. per cent Bonanza Brothers has the following capital investment opportunities for the next year: Preview