Question

A. As the financial manager of Wilmore Company Limited, with a passion to boost employment creation...

A. As the financial manager of Wilmore Company Limited, with a passion to boost employment creation through intraregional tourism in Ghana, you have acquired a land at Ho to put up an exquisite amusement park that features a number of attractions including games, pools, gardens, rides etc. The project will cost a total of GH₵100,000. The following cash flows are expected from the project. The beta of the project is 1.5 and the market return is 15%. The risk-free rate of return is 8%.
Year ₵
0 (100,000)
1 20,000
2 25,000
3 32,000
4 35,000








i. Using the CAPM approach, what is the cost of equity on this project?
[2 marks]
ii. Wilmore Company Limited is a levered entity with percentage of debt out of total capital being 40%. If the interest rate on a bank loan is 10%, the tax rate is 20%, and the cost of equity is as computed in (a), what will be the after tax cost of debt? [2 mark]
iii. What will be the weighted average cost of capital (WACC)? [2 mark]
iv. Using the WACC computed in (c), what will be the NPV of the investment? ` [3 marks]
v. Compute the IRR for the project? [3 marks]
vi. What will be your overall advice concerning viability of the project?
[2 marks]

B. Mr. Norman and Mr. Foster are both investors looking to buy financial assets. Mr. Norman prefers assets with the lowest prices while Mr. Foster prefers assets on the financial market with higher prices. Each of them currently has GHC 1,000 to invest and needs your assistance to know which asset to buy to suit their preference. The following information provides details of investment options.
a. Asset A is a bond with a coupon rate of 10% and pays semi-annual coupons. The par value is GHC 1,000, and the bond has 5 years to maturity. The yield to maturity is 11%.
b. Asset B is a stock whose dividend is expected to increase by 20% in one year and by 15% in two years. After that, dividends will increase at a rate of 5% per year indefinitely. The last dividend was GHC 100 and the required return is 20%.
Which asset will Mr. Norman and Mr. Foster invest in? [8 marks]
  
C. In the 2020 accounting year, investors made a number observations in terms of certain decisions some corporations were taking:
(i) The board of directors of some manufacturing and services companies decided to pay stock dividends instead of cash dividends;
(ii) On the other hand, the board of directors of majority of companies within the ICT industry decided to pay special cash dividends;
(iii) It was also observed that some the management of some companies had decided to repurchase shares while others were engaging in stock splits.

What could be the reason for these three decisions and choice of dividend payments by the boards of these companies and what will be the effect of such decisions on the outstanding number of shares and the share prices of these companies? [8 marks]

Homework Answers

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
As the financial manager of Wilmore Company Limited, with a passion to boost employment creation through...
As the financial manager of Wilmore Company Limited, with a passion to boost employment creation through intraregional tourism in Ghana, you have acquired a land at Ho to put up an exquisite amusement park that features a number of attractions including games, pools, gardens, rides etc. The project will cost a total of GH₵100,000. The following cash flows are expected from the project. The beta of the project is 1.5 and the market return is 15%. The risk-free rate of...
Mr. Norman and Mr. Foster are both investors looking to buy financial assets. Mr. Norman prefers...
Mr. Norman and Mr. Foster are both investors looking to buy financial assets. Mr. Norman prefers assets with the lowest prices while Mr. Foster prefers assets on the financial market with higher prices. Each of them currently has GHC 1,000 to invest and needs your assistance to know which asset to buy to suit their preference. The following information provides details of investment options. ​ a. Asset A is a bond with a coupon rate of 10% and pays semi-annual...
Mr. Armstrong and Mr. Spendwell are both investors looking to buy financial assets. Mr. Armstrong prefers...
Mr. Armstrong and Mr. Spendwell are both investors looking to buy financial assets. Mr. Armstrong prefers assets with the lowest prices while Mr. Spendwell prefers assets on the financial market with higher prices. Each of them currently has GHC 1000 to invest and needs your assistance to know which asset to buy to suit their preference. Do well to assist Mr. Armstrong and Mr. Spendwell to make a decision using the following information below; Asset A is a bond with...
C. In the 2020 accounting year, investors made a number observations in terms of certain decisions...
C. In the 2020 accounting year, investors made a number observations in terms of certain decisions some corporations were taking: (i) The board of directors of some manufacturing and services companies decided to pay stock dividends instead of cash dividends; ii) On the other hand, the board of directors of majority of companies within the ICT industry decided to pay special cash dividends; (iii) It was also observed that some the management of some companies had decided to repurchase shares...
You are the manager in charge of the audit of Nananom Company, a public limited liability...
You are the manager in charge of the audit of Nananom Company, a public limited liability company which manufactures specialist equipment and costumes for use in Kumahwood and Nafftti films in Ghana. Audited revenue is Ghc 100 million with profit before tax of Ghc 6.25 million. Audit work up to but not including, the obtaining of written representations has been completed. A review of the audit file has disclosed the following outstanding point: Kumahwood Nananom Company is facing a potential...
Kirk Limited, an automobile company financed by both debt and equity, is undertaking a new project....
Kirk Limited, an automobile company financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $100,000, but if the project is a failure, the firm will be worth only $20,000. The current value of Kirk is $50,000, a figure that includes the prospects for the new project. Kirk has outstanding zero coupon bonds due in one year with a face value of $40,000. Treasury...
ABS Limited, an automobile company financed by both debt and equity, is undertaking a new project....
ABS Limited, an automobile company financed by both debt and equity, is undertaking a new project. If the project is successful, the value of the firm in one year will be $150,000, but if the project is a failure, the firm will be worth only $50,000. The current value of ABS is $100,000, a figure that includes the prospects for the new project. ABS has outstanding zero coupon bonds due in one year with a face value of $85,000. Treasury...
Codger Limited acquired a 40% investment in Lodger Limited for $50 000. Lodger declared and paid...
Codger Limited acquired a 40% investment in Lodger Limited for $50 000. Lodger declared and paid a dividend of $10 000. Codger Limited does not prepare consolidated financial statements. The appropriate entry for the investor to record this dividend is: a. DR Cash $4 000 CR Investment in associate $4 000 b. DR Dividends payable $4 000 CR Cash $4 000 c. DR Cash $4 000 CR Dividend revenue $4 000 d. DR Investment in associate $4 000 CR Dividend...
Section 5: Subsidiary 5 – General Machinery Company Limited (Case for Audit Partner) General Machinery Company...
Section 5: Subsidiary 5 – General Machinery Company Limited (Case for Audit Partner) General Machinery Company Limited, a subsidiary company of Las Vegas Group Corporation (USA) Limited, is primarily a distributor of a range of machinery and equipment and also engages in other business activities. It has assets of approximately $4m, including current assets of nearly $2m. The draft Statement of Financial Performance of the company has just been completed by the company accountant and presented to the auditors, Disneyland...
The following information of Fortune Co. is given: Assets $m Current assets 10 Fixed assets 90...
The following information of Fortune Co. is given: Assets $m Current assets 10 Fixed assets 90 Total assets 100 Balance Sheets: Liabilities and Equity $m Current liabilities 20 Non-current liabilities 30 Equity 50 Total equity and liabilities 100 The net income of this financial year is $4 million. The dividends of Fortune Co. are $2 million in total. The current stock price is $6.5 per share and 30 million shares are outstanding. Now, the board directors of Fortune Co. are...