Financial Management (May 2023 Exam) Flashcards
(14 cards)
** Calculate the theoretical ex-rights price (TERP) following the rights issue.**
= £3.46
** If the before-tax-return of investing in the increased tent-manufacturing facility is estimated to be 13%, using the appropriate calculations, demonstrate whether this project will increase shareholder wealth and hence the brights issue should go ahead.**
An alternative to funding the project via a rights issue would be to raise debt finance. Identify and explain THREE factors which will influence whether the company raises debt finance via a bank loan or a bond issue.
Using key accounting ratios, identify what the impact of raising debt would have on the company if £200m is raised at an interest rate of 9% per annum.
** (a) Use the above information to calculate Brynkir plc’s weighted average cost of capital (WACC) using market values as weights.**
= 9.3%
(b) What will have been the consequences of the company using a discount rate of 12% in the past?
(c) Respond to the following three statements as to whether they are true or false, explaining your reasoning:
(1) A company’s cost of equity is the single most important and difficult to calculate figure in the WACC calculation.
(2) Bank loans will always be cheaper than debt finance raised via a bond issue.
(3) Once calculated, there is little need for a company to recalculate its WACC in future years.
(a) Calculate the net present value (NPV) of the new mine project and advise Highcliffe plc whether they should go ahead with the investment.
(b) Another member of the board has argued that the project should be appraised using internal rate of return (IRR) was it is superior to NPV. Calculate the IRR of the new mine project and comment on the board member’s statement.
