Business College

7. FINC 302 is a long-term debt where the face amount of each bond is GH¢ 1,000. The coupon rate is 20% to be paid semi-annually. The 5-year risk-free rate is 20% p.a. It is estimated that the risk premium appropriate to company Y is 6 percentage points

Answers

Answer 1

The required rate of return is 26.00% whereas the WACC is 23.00%

What is required rate of return?

The required rate of return is the rate of return that investors  expect from the stock based using the Capital Asset Pricing Model(CAPM) formula shown below:

required rate of return=risk-free rate+ risk premium

risk-free rate=20%

risk premium=6%

required rate of return=20%+6%

required rate of return=26.00%

What is WACC?

WACC means weighted average cost of capital is the sum of the cost of equity and the cost of debt multiplied by their respective weights in the firm's capital structure.

WACC=(required rate of return*weight of equity)+(cost of debt*weight of debt)

Note that there is an implicit assumption in this case that equity and debt have are 50%:50%

required rate of return=26%

cost of debt=coupon rate=20%

WACC=(26%*50%)+(20%*50%)

WACC=23.00%

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Complete question with requirement:

FINC 302 is a long term debt where face amount of each bond is GH¢ 1,000. The coupon rate is 20% to be paid semi annually. The 5-year risk free rate is 20% p.a. It is estimated that the risk premium appropriate to company Y is 6 percentage point.

Calculate the required rate of return and the WACC

Related Questions

On 1 October 2020 property, plant, and equipment of Kobia Limited consisted of the following balances:


Original Cost
Accumulated Depreciation

Land and buildings
R550 000
-

Plant and Equipment
R875 400
R338 200

Motor vehicles
R647 000
R211 000

Furniture and fittings
R125 000
R 32 000

The straight-line rates of depreciation, based on cost, used to date were 10% per annum for plant and equipment; 20% per annum for motor vehicles; and 12.5% per annum for furniture and fittings. It is the company’s policy to make full year’s depreciation charge on new capital items of fixed assets in the year of purchase. No depreciation is raised on capital items sold during the year. The following additional information is relevant to the calculation of depreciation for the year ended 30 September 2021.

a) Walter & Associates, a firm of appraisers and valuers, professionally valued Land, and buildings during the year at R975 000. When land and building were acquired, R350 000 was attributable to the buildings.

b) An item of equipment bought in November 2016 for R105 000 is now recognised to have a total useful life of 20 years.

c) A motor vehicle purchased in June 2018 for R85 000 was traded in at a value of R44 000 in part exchange for a new motor vehicle costing R140 000.

d) Included with the furniture and fittings is an item which originally cost R15 000, and which is already fully depreciated and is to be discarded.

You are required to:
Prepare a reconciliation schedule for property, plant, and equipment in a form suitable for inclusion in the company’s financial statements for the financial reporting period ended 30 September 2021. Clearly show the amount to be charged against the year’s profits and the balances to be shown on the statement of financial position. You may include the relevant accounting policy note as part of your answer. Ignore taxation.

Answers

The preparation of a reconciliation schedule for property, plant, and equipment in a suitable form for the financial reporting period ended 30 September 2021 for Kobia Limited is as follows:

Property, Plant, and Equipment Reconciliation Schedule:                      

                                           Land &          Plant &           Motor        Furniture

                                         Building       Equipment      Vehicles     & Fittings

Original Costs:

Beginning balance        R550 000       R875,400     R647,000    R125,000

Revaluation/Addition       425,000             -                 140,000        (15,000)

Write-off                                                                         (85,000)

Ending balance             R975,000       R875,400     R702,000     R110,000

Accumulated Depreciation:

Beginning balance                   -           R338,200      R211,000     R 32,000

Adjustments:

Depreciation Expense            -             R87,540      R140,400      R 13,750

Write-off                                                                        (34,000)

Ending balance                                    R425,740     R317,400       R45,750

Data and Calculations:

a) Land and Building:

Revaluation Surplus = R425,000 (R975,000 - R550,000)

b) Useful life of the new item of equipment = 20 years

c)  Additional Motor Vehicle = R140,000

d) Motor Vehicle

Trade-in value at cost = R85,000

Trade-in value Accumulated Depreciation = R34,000 (R85,000 x 20% x 2 years)

Book value of Motor Vehicle = R51,000

Exchange value =                        44,000

Loss from trade-in =                    R7,000

Depreciation Rates and Expense:

                                           Land &          Plant &           Motor        Furniture

                                         Building       Equipment      Vehicles     & Fittings

Depreciation Rate                 0                   10%              20%             12.5%

Depreciation Expense       R0             R87,540     R140,400       R 13,750

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A colleague has an appointment scheduled for 10:00am to see your Manager. Unfortunately, he is not in the office when the colleague arrives, and you do not know where he is or how long he will be. How will you handle this situation? (4)​

Answers

Answer:

I will go to my office and sit

Puvo, Incorporated, manufactures a single product in which variable manufacturing overhead is assigned on the basis of standard direct labor-hours. The company uses a standard cost system and has established the following standards for one unit of product:



Standard Quantity Standard Price or Rate Standard Cost
Direct materials 7.40 pounds $ 1.20 per pound $ 8.88
Direct labor 0.40 hours $ 49.50 per hour $ 19.80
Variable manufacturing overhead 0.40 hours $ 10.10 per hour $ 4.04

During March, the following activity was recorded by the company:



The company produced 4,000 units during the month.
A total of 21,000 pounds of material were purchased at a cost of $15,180.
There was no beginning inventory of materials on hand to start the month; at the end of the month, 5,220 pounds of material remained in the warehouse.
During March, 1,250 direct labor-hours were worked at a rate of $46.50 per hour.
Variable manufacturing overhead costs during March totaled $15,661.


The direct materials purchases variance is computed when the materials are purchased.



The variable overhead rate variance for March is:

Answers

The variable overhead rate variance for March for Puvo Incorporated is $3,036 Unfavorable.

What is the variable overhead rate variance?

The variable overhead rate variance calculates the difference between the actual variable overhead incurred and the standard variable overhead.

The standard variable overhead is the actual hours worked multiplied by the standard variable overhead rate.

Data and Calculations:

                         Standard Quantity    Standard Price or Rate Standard Cost

Direct materials      7.40 pounds         $ 1.20 per pound           $ 8.88

Direct labor               0.40 hours          $ 49.50 per hour         $ 19.80

Variable manufacturing

overhead                 0.40 hours            $ 10.10 per hour          $ 4.04

Actual production = 4,000 units

Actual direct labor-hours = 1,250 DLHs

Actual variable overhead costs = $15,661

Variable overhead rate variance = actual variable manufacturing overhead - actual hours worked x standard variable overhead rate

= $15,661 - (1,250 x $10.10)

= $3,036 Unfavorable

Thus, the variable overhead rate variance for March for Puvo Incorporated is $3,036 Unfavorable.

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Which of the following statements about capital structure are correct? Select ALL correct answers.

A company needs to consider the current economic climate when making decisions on debt and equity proportions.

A company should always finance its business using as much debt as possible in order to optimize the capital structure.

Having too much equity may dilute earnings and the value of the original investors.

Having too little debt may increase the risk of default in repayment.
?

Answers

Having too much equity may dilute returns and the value of the original investors capital structure are correct.

What is the capital structure?

Capital structure refers to the specific mix of debt and equity used to invest a company's assets and operations. From a corporate perspective, equity denotes a more expensive, permanent source of capital with more significant financial flexibility.

What is capital structure and why is it important?

Capital structure relates to how much money—or capital—is helping a business, financing its assets, and funding its operations. It can also show company investments and capital expenditures that can affect the business's bottom line.

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