Hemaye Brown Ltd has retained earnings available of (Read-Only)-Word Find ERENCE

Question

Hemaye Brown Ltd has retained earnings available of (Read-Only)-Word Find ERENCES MAILINGS REVIEW VEw PAGE LAYOUT RE FILE HOME INSERT DESIGN 1 Normal T No Spac.. Heading 1 Heading 2 Styles Arial Editin Paragraph The most recent Statement of Financial Position for Sky Ltd (Book value information) is provided below Font Cipboard s S Million) $5 $15 Equity 500,000 Preference shares 10,000,000 Ordinary shares Liabilities $20 Debt (debentures) Total $40 The Market value information is provided below The company's debentures have a maturity of five years and a total face value of $20 million paying a coupon rate (half-yearly) of 12% per annum. The current yield on company debentures of similar rating is 15% per annum. The current market price for the company's preference shares is $4 and the price for its ordinary shares is $3.90 A Calculate the market value for each of the company's source of capital b. Calculate the proportions (weight) for the company's each source of capital, using 1. Book values 2. Market values c. Calculate the Capital Structure (Debt to Equity ratio) of the Book Value and the PAGE 5 OFS 684 WORDS

Explanation / Answer

Annual Interest amount =2.4 million (20*12%)

Terminal payment=20 million

Calculation of market value of debentures=PV of cash inflows

=2.4PVAF(15%,5)+20PVIF(15%,5)

=3.3522×2.4+0.4972×20=8.04528+9.944=18.34928

=18.35(rounded off)

Calcuation of market value of company

Calculation of weights on basis of book value

Calculation of weights on the basis of book value

Debt to equity ratio on book value basis

=Debt/shareholders equity =20/(15+5)=1:1

Debt to equity ratio on the bsis of market value

=Debt/equity=18.35/(39+2)=0.45:1(rounded off)

Particulars Amount Market value of Preference shares(500000*4) 2million Market value of ordinary shares(10million*3.9) 39million Market value of debt as calculated above 18.35million Total market value of company 59.35million

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