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Tinep Co is planning to raise funds for an expansion of existing business activities and in preparation for this the company has decided to calculate its weighted average cost of capital. Tinep Co has the following capital structure:

   $m  $m
Equity    
Ordinary shares 200  
Reserves 650  
    850
Non-current liabilities    
Loan notes   200
    1,050

 

The ordinary shares of Tinep Co have a nominal value of 50 cents per share and are currently trading on the stock market on an ex dividend basis at $5.85 per share. Tinep Co has an equity beta of 1.15.

The loan notes have a nominal value of $100 and are currently trading on the stock market on an ex interest basis at $103.50 per loan note. The interest on the loan notes is 6% per year before tax and they will be redeemed in six years' time at a 6% premium to their nominal value.

The risk-free rate of return is 4% per year and the equity risk premium is 6% per year. Tinep Co pays corporation tax at an annual rate of 25% per year.

Requirements:

a

Calculate the market value weighted average cost of capital and the book value weighted average cost of capital of Tinep Co, and comment briefly on any difference between the two values.

Marks: 9
b

Discuss the factors to be considered by Tinep Co in choosing to raise funds via a rights issue.

Marks: 6
c

Explain the nature of a scrip (share) dividend and discuss the advantages and disadvantages to a company  of using scrip dividends to reward shareholders.

Marks: 5

Answers submitted

Created by Ref Marking Action
Rakhi Gupta's picture
Rakhi Gupta
11/03/2020 - 15:29
a
10008
9
Rakhi Gupta's picture
Rakhi Gupta
11/03/2020 - 17:41
b
10010
6
Rakhi Gupta's picture
Rakhi Gupta
11/03/2020 - 17:47
c
10012
5
Abhro Gourab Das's picture
Abhro Gourab Das
09/04/2020 - 19:22
a
9610
9
Apurba nandy's picture
Apurba nandy
03/03/2020 - 22:55
a
9034
9
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
12/03/2019 - 22:00
a
7778
9
Tanzeer UL Alaam's picture
Tanzeer UL Alaam
12/03/2019 - 21:59
a
8368
9
Apurba nandy's picture
Apurba nandy
12/01/2019 - 21:31
a
7780
9
Apurba nandy's picture
Apurba nandy
12/01/2019 - 21:24
a
5866
9
Apurba nandy's picture
Apurba nandy
12/01/2019 - 21:47
a
8308
9
Apurba nandy's picture
Apurba nandy
12/01/2019 - 22:14
b
7792
6
Apurba nandy's picture
Apurba nandy
12/01/2019 - 22:14
b
8310
6
Apurba nandy's picture
Apurba nandy
12/01/2019 - 22:37
c
8312
5
Apurba nandy's picture
Apurba nandy
11/03/2019 - 20:31
c
7798
5
Apurba nandy's picture
Apurba nandy
11/03/2019 - 20:48
c
7808
5
hasarul basher pollob's picture
hasarul basher ...
11/03/2019 - 19:56
a
7770
9
hasarul basher pollob's picture
hasarul basher ...
11/03/2019 - 20:18
b
7788
6