Financing Decision

Dartig Co (12/08)

Dartig Co is a stock-market listed company that manufactures consumer products and it is planning to expand its existing business. The investment cost of $5 million will be met by a 1 for 4 rights issue. The current share price of Dartig Co is $2.50 per share and the rights issue price will be at a 20% discount to this. The finance director of Dartig Co expects that the expansion of existing business will allow the average growth rate of earnings per share over the last four years to be maintained into the foreseeable future. 

Froste Co | ACCA Specimen (CBE)

Froste Co has a dividend payout ratio of 40% and has maintained this payout ratio for several years. The current dividend per share of the company is $0.50 per share and it expects that its next dividend per share, payable in one year's time, will be $0.52 per share.

 

The capital structure of the company is as follows:

 

 

$m

$m

Equity

 

Fence Co (6/14, amended)

The equity beta of Fence Co is 0.9 and the company has issued 10 million ordinary shares. The market value of each ordinary share is $7.50. The company is also financed by 7% bonds with a nominal value of $100 per bond, which will be redeemed in seven years' time at nominal value. The bonds have a total nominal value of $14 million. Interest on the bonds has just been paid and the current market value of each bond is $107.14.

AQR Co (6/11, amended)

The finance director of AQR Co has heard that the market value of the company will increase if the weighted average cost of capital of the company is decreased. The company, which is listed on a stock exchange, has 100 million shares in issue and the current ex div ordinary share price is $2.50 per share. AQR Co also has in issue bonds with a book value of $60 million and their current ex interest market price is $104 per $100 bond. The current after-tax cost of debt of AQR Co is 7% and the tax rate is 30%.

The recent dividends per share of the company are as follows.

Harpoon Co (6/15)*

Harpoon Co is planning to raise $14.4m through a rights issue. The chief financial officer of Harpoon has analyzed that it would take a 20% discount on the market price of share, which is currently $4.5, to make the new issue of shares fully subscribed.  The rights issue will be on a 1 for 5 basis and issue costs of 2% on the cash raised will be paid out of the cash raised. The capital structure of Harpoon Co is as follows: