Solve all the following questions. Thank you
Kooldean plc was founded several years ago by the inventor of an innovative consumer product. The product has been very successful in the UK and the inventor has decided to seek a quote on the Alternative Investment Market (AIM). At present 60% of Koolclean plc's shares are held by the inventor and the remaining 40% are held by a venture capitalist who is keen for the company to list in this way so that his block of shares can be sold. The company has been managed by the inventor herself, assisted by a part-time director appointed by the venture capitalist. The part-time director will step down when the venture capitalist's block of shares is sold. The inventor is keen to appoint an experienced management team and has decided to offer a remmeration package that comprises a fairly large number of share options and a relatively small salary in order to attract a particular type of manager. Kooldean plc has published audited financial statements every year since it was incorporated. The inventor has decided to replace the company's audit firm with one that is larger and more experienced in auditing the financial statements of quoted companies. (i) Explain the advantages and disadvantages of seeking the initial funding for a new business in the form of equity from a venture capitalist rather than borrowing. [6] (ii) Explain the agency issues that are likely to arise from paying the new directors with share options rather than salaries. [8] (iii) Describe the external auditor's role in protecting Koolclean pic's shareholders' interests after it obtains its quotation. [6] [Total 20]Company A and B are in the same risk class and are identical in every respect except that Company A is geared while B is not. Company A has Sh 6 million in 5% bonds outstanding. Both companies earn 10% before interest and taxes on their Sh 10 million total assets. Assume perfect capital markets, rational investors, a tax rate of 60% and a capitalization rate of 10% for an all equity company. Required: (a) Compute the value of firms A and B using the net income (NI) approach and Net operating income (NOD) approach. (b) Using the NOI approach, calculate the after tax weighted average cost of capital for firms A and B. Which of these firms has the optimal capital structure according to NOI approach? Why? (c) According to the NOI approach, the values of firms A and B computed in (a) are not in equilibrium. Assuming that you own 10% of A's shares, show the process which will give you the same amount of income but at less cost. At what point would this process stop?Companies U and L. are identical in every respect except that U is unlevered while L has Sh 10 million of 5% bonds outstanding. Assume (a) That all of the MM assumptions are met That there are no corporate or personal taxes That EBIT is Sh 2 million That the cost of equity to company U is 10% Required: Determine the value MM would estimate for each firm Determine the cost of equity for both firms i11. What is the overall cost of capital for both firms iv. Suppose the value of U is Sh 20 million and that of L. is Sh 22 million. Explain the arbitrage process for a shareholder who owns 10% of company L's shares
