Comprehensive Problem

PART 1- WACC part- The capital structure of GBI Corporation in the past year is composed of 240,000,000 from issuance of
ordinary shares. Par value of those shares is Php 10.00 per share however they can be sold at Php 50.00 per share. For the past two
years, ordinary share dividends amounted to 5 per share. The expected dividend growth rate is 4%. Corporation pays income tax at
the rate of 30%.
A boom in their business has caused Corporation’s management to expand its operations in key cities all over the country. The
planned expansion project requires an investment of 240,000,000, a 100% increase in the corporation’s present capital structure.
Management has decided to fund the expansion using the following:
1- Long term loans of 75,000,000.00. Interest rate 10% compounded annually. Maturity term is 5 years. Proceeds received after
flotation costs is 72,000,000.00
2- Issuance of 8% preferred stocks, expected proceeds of 48M, net of 2M flotation costs
3- Issuance of ordinary shares expected proceeds of 50M net of 6% flotation costs
4- Another 50M is coming from its own Retained earnings
5- Php 20,000,000.00 proceeds came from a short term loan with 8% stipulated interest. The 20 million is net of the following:
- Service charge of 2% of the applied loan principal
- Compensating balance of 10% of the loan. That balance earned 3% interest income.

PART 2- CAPITAL BUDGETING PART- One of the investments funded by GBI Corporation is the replacement of old equipment
with a remaining book value of 500,000. The old equipment was sold for 400,000. The new equipment was purchased and installed
for a total cost of 5,000,000.00. Useful life of the equipment is 10 years with a salvage value of 250,000.00. The new equipment is
expected to produce Cash inflow and savings to the company before depreciation of:
Year 1- 3- 1,000,000
Year 4-6 1,200,000
Year 7-10 700,000
Market rate of interest or discount rate is about 13%

(7 points each)

1. (PART 1)-What is the Cost of capital rate for Long term loans?
a. 7.7592% b. 11.08462% c. 8.3333333% d. 15.0638%
e. 14.4% f. 8.75% g. 12.85346% h. 11.48796%
i. 17.596795% j. 6.125%
2. (PART 1)-What is the Cost of Capital rate for preferred stocks?
a. 7.7592% b. 11.08462% c. 8.3333333% d. 15.0638%
e. 14.4% f. 8.75% g. 12.85346% h. 11.48796%
i. 17.596795% j. 6.125%
3. (PART 1)-What is the cost of capital rate for ordinary shares?
a. 7.7592% b. 11.08462% c. 8.3333333% d. 15.0638%
e. 14.4% f. 8.75% g. 12.85346% h. 11.48796%
i. 17.596795% j. 6.125%
4. (PART 1)-What is the Cost of Capital rate for Retained Earnings?
a. 7.7592% b. 11.08462% c. 8.3333333% d. 15.0638%
e. 14.4% f. 8.75% g. 12.85346% h. 11.48796%
i. 17.596795% j. 6.125%
5. (PART 1)-What is the Cost of Capital rate for short-term loans?
a. 7.7592% b. 11.08462% c. 8.3333333% d. 15.0638%
e. 14.4% f. 8.75% g. 12.85346% h. 11.48796%
i. 17.596795% j. 6.125%
6. (PART 1)-What is the amount of loan granted before the deductions?
a. 20,000,000 b. 22,727,272.73 c. 20,500,000.00 d. 17,600,000
e. 19,600,000 f. 20,408,163.26
7. (PART 1)-What is the weighted average cost of capital?
a. 7.7592% b. 11.08462% c. 8.3333333% d. 15.0638%
e. 14.4% f. 8.75% g. 12.85346% h. 11.48796%
i. 17.596795% j. 6.125%
8. PART 2What is the internal rate of return?
a. 7.7592% b. 11.08462% c. 8.3333333% d. 15.0638%
e. 14.4% f. 8.75% g. 12.85346% h. 11.48796%
i. 17.596795% j. 6.125%
9. PART 2What is the accounting rate of return for the 1st year?
a. 7.7592% b. 11.08462% c. 8.3333333% d. 15.0638%
e. 14.4% f. 8.75% g. 12.85346% h. 11.48796%
i. 17.596795% j. 6.125%
10. PART 2What is the Net Present Value Index?
a. 828,561 b. 324,914 c. 754,914 d. 724,914
11. PART 2What is the Profitability Index?
a. 1.06498 b. 1.15759 c. 1.18130 d. 1.0797122
12. PART 2What is the payback period?
a. 4.66667 years b. 4.33333 years c. 4.308333 years d. 6.82399 years
e. 6.9248 years f. 8.4906 years
13. PART 2-What is the discounted payback period?
a. 4.66667 years b. 4.33333 years c. 4.308333 years d. 6.82399 years
e. 6.9248 years f. 8.4906 years

14. PART 2-Capital budgeting part-What is the cost of investment?

a. 5,000,000 b. 4,600,000 c. 4,570,000 c. 4,750,000

15. PART 2- Is the purchase of new equipment profitable for the company?
a. Yes, because the Net present value is positive, the profitability index is greater than 1 and the internal rate of return is
greater than the weighted average cost of capital.
b. No because even if the Net Present value is positive and profitability index is greater than 1, the internal rate of return is
lower than the weighted average cost of capital.
c. No because the cost is greater than the present value of inflow/s and savings.
d. Cannot decide based on the given data.