SLAY, LLAWE USE ESILEHELE TULEVER Rob's Rockery Ltd. e nightclubs and pub operator, is considering different capital structures for its future. While the company had rapid growth in the post its growth has been converging to a near constant rate. The company has been listed for many years and can be considered a mature business facing limited risk; however, in the eyes of the management of the company. the capital structure does not reflect this as very little debt is employed in the structure. A recent shareholder meeting led to a call for more debt to be used, higher sornings per here to be achieved and, in turn, increased dividend payments to be made, while a push for higher return on equity (ROE) was also requested by many shareholders. A dividend pay-out ratio of 30% had been agreed to in principle, dependent on the viability thereof under a capital structure incorporating more delst. Other relevant current information to provided in the table below: Current Item Current value Bote 1.20 DVE (debe equity) ratio 50% Market cont of debt 10% (kvant to Rob's Rockory La Risk -free rate Market return 10% Morkot risk premium Shares in IROLIG SOO 000 Market price per chare Total tica R 2000 ODTO Total assets F 000 ODO Stabile devidond RII Operating profit (EBIT) R3 000 000 (not expected to change under either now structure) Book cost of debt 3% (applicable to total liabilities under the current capital atructure) Tax rate 20% RIO The two proposed structures that the company are considering is as follows: Structure X: 50% debat, 50% equity Structure Y: 60% delt, 40% equity The book weights of the different sources of capital are considered to approximate the market weights in the cases of both possible structures, and the company has no target capital structure i intends to revert to in the future The group chief financial officer (CFO) of the holding company of which Rob's Rockery Ltd is a subsidiary, found that the company can best borrow from a bank at a market related cost of 10% on new loans while it would be possible to sue shares at R10 piece and net 90% of the issue price. The board has resolved that no shares will be bought back or retired and that retained earnings should not be touched during this exercise The group CFO has tasked you, the financial manager of Rob's Rockery Ltd, with tabling different sources of financing the company can be. She has already propcood proportion of capital based on her extensive experience in the field and industry. She has tasked you with evaluating the two options that will go to the board. Both capital structures are considered to Le plausible and have benefits and drawbacks, therefore, the group CFO tasked you with evaluating the two possibile structures as set out below: The report should be structured as follows (with the expected calculations to base your discussions on indicated in brackets): 4. Cost (weighted average cost of capital) B. Risk (debt ratio, times interest earned or intercot coverago ratio) c. Profitability (ROE, EPS) D. Dividend payment feasibility (dividends per share) E. Financial flexibility of each structure F. Arguments for and against each structuro (9 marks) (5 marts) (5 marks) (4 marks) (2 marks) (5 marts) SLAY, LLAWE USE ESILEHELE TULEVER Rob's Rockery Ltd. e nightclubs and pub operator, is considering different capital structures for its future. While the company had rapid growth in the post its growth has been converging to a near constant rate. The company has been listed for many years and can be considered a mature business facing limited risk; however, in the eyes of the management of the company. the capital structure does not reflect this as very little debt is employed in the structure. A recent shareholder meeting led to a call for more debt to be used, higher sornings per here to be achieved and, in turn, increased dividend payments to be made, while a push for higher return on equity (ROE) was also requested by many shareholders. A dividend pay-out ratio of 30% had been agreed to in principle, dependent on the viability thereof under a capital structure incorporating more delst. Other relevant current information to provided in the table below: Current Item Current value Bote 1.20 DVE (debe equity) ratio 50% Market cont of debt 10% (kvant to Rob's Rockory La Risk -free rate Market return 10% Morkot risk premium Shares in IROLIG SOO 000 Market price per chare Total tica R 2000 ODTO Total assets F 000 ODO Stabile devidond RII Operating profit (EBIT) R3 000 000 (not expected to change under either now structure) Book cost of debt 3% (applicable to total liabilities under the current capital atructure) Tax rate 20% RIO The two proposed structures that the company are considering is as follows: Structure X: 50% debat, 50% equity Structure Y: 60% delt, 40% equity The book weights of the different sources of capital are considered to approximate the market weights in the cases of both possible structures, and the company has no target capital structure i intends to revert to in the future The group chief financial officer (CFO) of the holding company of which Rob's Rockery Ltd is a subsidiary, found that the company can best borrow from a bank at a market related cost of 10% on new loans while it would be possible to sue shares at R10 piece and net 90% of the issue price. The board has resolved that no shares will be bought back or retired and that retained earnings should not be touched during this exercise The group CFO has tasked you, the financial manager of Rob's Rockery Ltd, with tabling different sources of financing the company can be. She has already propcood proportion of capital based on her extensive experience in the field and industry. She has tasked you with evaluating the two options that will go to the board. Both capital structures are considered to Le plausible and have benefits and drawbacks, therefore, the group CFO tasked you with evaluating the two possibile structures as set out below: The report should be structured as follows (with the expected calculations to base your discussions on indicated in brackets): 4. Cost (weighted average cost of capital) B. Risk (debt ratio, times interest earned or intercot coverago ratio) c. Profitability (ROE, EPS) D. Dividend payment feasibility (dividends per share) E. Financial flexibility of each structure F. Arguments for and against each structuro (9 marks) (5 marts) (5 marks) (4 marks) (2 marks) (5 marts)