Jolly Joe’s Novelties Cash Conversion Cycle Assignment Help
1.The Jelly Bean Corporation (JBC) has instructed you to estimate its weighted average cost of capital (WACC). You are given the following data:
JBC has a corporate tax rate of 35%. New debt in the form of 15-year bonds could be sold at par to yield 8% paid annually (the yield to maturity on the existing debt) with each $1,000 bond incurring before-tax underwriting expenses of $45. New preference shares can be sold at par to provide a dividend yield of 9% with before-tax issuing and underwriting expenses amounting to 7% of par value. Ordinary shares can be sold to an underwriting syndicate at $12.60 per share, which represents a 10% discount from the current market price. Before-tax issuing and underwriting expenses would be 6.5% of the issue price. Current earnings per share are $1.54, and the stock just paid a dividend of $0.72 per share. Analysts agree that both earnings and dividends will grow at a rate of 6% in the foreseeable future. In addition, the current risk-free rate of return is 4%, the historical market price of risk is 7%, and the beta of JBC ordinary shares is 1.05. JBC must issue new ordinary equity to meet this year’s capital expenditure requirements.
Jelly Bean Corp. has the following balance sheet figures:
|Long-term bonds (9% coupon, 15-year maturity )||$ 35,000,000|
|Preference shares (1,000,000 shares outstanding, $15 par value,10% dividend)||$ 15,000,000|
|Ordinary shares ( 4,000,000 shares outstanding)||$ 20,000,000|
|Retained earnings||$ 30,000,000|
a. What is the after-tax cost (in %) and market value of JBC’s long-term debt?
b. What is the after-tax cost (in %) and market value of JBC’s preference shares?
c. What is the after-tax cost (in %) and market value of JBC’s ordinary equity, using the CAPM?
Based on the CAPM estimate of the cost of ordinary equity, what is JBC’s WACC?
d. What factors affect real-world debt level and capital structure of the company?
2.a)Given that a company’s net operating cash flows are $2 million per year in perpetuity and the market value of capital is $10 million, what is the company’s cost of capital?
b)Calculate the cost of equity capital using CAPM if the risk-free rate of interest is 5 per cent, the return on the market portfolio is 12 per cent and beta of equity is 0.8:
c)Given that preference shares have an expected dividend stream of 20 cents in perpetuity and that the current market price of the preference shares is $2.40, calculate the cost of capital (kp)of these preference shares.
d)Calculate the weighted average cost of preference shares and ordinary shares if there are: 1 million preference shares with market value of $2.50 each and an opportunity cost of 10.8%; 10 million ordinary shares with market value of $4.50 each and an opportunity cost of 16.5%.
3.A consultant has collected the following information regarding Hobbit Manufacturing:
Operating income (EBIT) $600 million, Interest expense $0, Tax rate 40%, Debt $0, Cost of equity 7%, WACC 7% . The company has no growth opportunities (g = 0), so the company pays out all of its earnings as dividends . Hobbit can borrow money at a pre-tax rate of 6%. The consultant believes that if the company moves to a capital structure consisting of 30% debt and 70% equity (based on market values), which would require taking on debt in the amount of $1,617 million, that the cost of equity will increase to 8% and the pre-tax cost of debt will remain at 6%, but the value of the firm will rise. Is the consultant correct? If the company makes this change, what will be the increase in total market value for the firm?
4.a)Suppose it takes Jolly Joe’s Novelties, Inc. 5 days to build and sell toys (on average). Also suppose it takes the firm’s customers 30 days, on average, to pay for the toys after they have purchased them on credit. Finally, suppose the firm is able to delay paying for the materials it uses in the manufacturing process for 30 days. Given these conditions, how long is Jolly Joe’s cash conversion cycle?
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b)f Jolly Joe’s buys $100 worth of supplies on credit with terms 2/15 n30 and pays the bill on the 30th day after the purchase:
a. What is the approximate, or “nominal,” cost of trade credit as an annual rate?
b. What is the exact cost of trade credit as an annual rate?
5.A Company issues 14% irredeemable preference shares of the face value of $ 100 each.Flotation costs are estimated about 5% of the expected sale price.What is the cost of Prefernce shares if Preference shares are issued at
6.A limited has the following capital structure:
|Equity share capital (2,00,000 shares)
6% Preference shares
The market price of the company’s equity share is Rs.20. It is expected that company will pay a dividend of Rs. 2 per share at the end of the current year, which will grow at 7% for ever. The tax rate is 30%. You are required to compute the following:
1. Weighted average cost of capital based on existing capital structure
2. The new weighted average cost of capital if the company raises an additional Rs. 20,00,000 debt by issuing 10% debentures. This would result in increasing the expected dividend to Rs.3 and leave the growth rate unchanged but the price of the share will fall to Rs.15 per share.
3. The cost of capital if in above (2) , growth rate increases to 10%.
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