Beta Limited, a private equity company in which you are a member of its board of directors, shows the following long-ter
Posted: Tue Jan 18, 2022 12:58 pm
Beta Limited, a private equity company in which you are a member
of its board of directors, shows the following long-term capital
structure:
Long-Term
Liabilities:
€(000’s)
8% Loan
Stock
3,200
Capital and Reserves:
3.2m Ordinary Shares of €1.00
each
3,200
Profit and Loss
Reserve
1,600
Revaluation
Reserve
2,400
Share Premium
Reserve
2,400
_____
Total
9,600
Beta Limited, has already declared a 15 cents per share
dividend, which represents the normal dividend policy of the
company.
Beta Limited, has been proposed to participate as a partner in a
long term (6 year) project investing now €10m with guaranteed
annual cash returns as follows:
Year 1: €2.4m,
Year 2: €3.4m,
Year 3: €3.2m,
Year 4: €2.4,
Year 5: €2.0m,
Year 6: €2.4m.
Requirments:
a) Calculate the cost of Debt Capital
b)Calculate the cost of equity
c)Calculate the Weighted Average Cost of Capital
d)Calculate the net present value (NPV) of the benefit of Beta
Limited if it is decided to participate in the project, on the
basis of the weighted average cost of capital of the company, since
the intention is to maintain the capital structure of Beta Limited
unchanged (ignore taxation).
(Use the NPV method of investment appraisal with the WACC as the
discount rate)
e)Calculate the Internal Rate of Return (IRR) of the proposed
project
of its board of directors, shows the following long-term capital
structure:
Long-Term
Liabilities:
€(000’s)
8% Loan
Stock
3,200
Capital and Reserves:
3.2m Ordinary Shares of €1.00
each
3,200
Profit and Loss
Reserve
1,600
Revaluation
Reserve
2,400
Share Premium
Reserve
2,400
_____
Total
9,600
Beta Limited, has already declared a 15 cents per share
dividend, which represents the normal dividend policy of the
company.
Beta Limited, has been proposed to participate as a partner in a
long term (6 year) project investing now €10m with guaranteed
annual cash returns as follows:
Year 1: €2.4m,
Year 2: €3.4m,
Year 3: €3.2m,
Year 4: €2.4,
Year 5: €2.0m,
Year 6: €2.4m.
Requirments:
a) Calculate the cost of Debt Capital
b)Calculate the cost of equity
c)Calculate the Weighted Average Cost of Capital
d)Calculate the net present value (NPV) of the benefit of Beta
Limited if it is decided to participate in the project, on the
basis of the weighted average cost of capital of the company, since
the intention is to maintain the capital structure of Beta Limited
unchanged (ignore taxation).
(Use the NPV method of investment appraisal with the WACC as the
discount rate)
e)Calculate the Internal Rate of Return (IRR) of the proposed
project