Managerial Finance - Spring

Assignment 5

Question 1. X. Co. has made plans for next year. It is estimated that the company will employ total assets
of BDT 800,000. Fifty (50) percent of the assets being financed by borrowed capital at an interest
cost 8 percent per year. The direct cost for the year are estimated at BDT 480,000 and all other
expenses are estimated BDT 80,000. The goods will be sold to customer at 150 percent of the
direct costs. Tax rate is assumed to be 50 percent.
You are required to calculate:
a) net profit margin b) return on assets c) assets turnover and d) return on owners equity

Question 2. X company's expected dividend now is BDT 3.48 per share. Its dividends are expected to grow
at 15 percent for six years and then at a rate 8 percent indefinitely. The capitalization rate is
12 percent. What is the price of share today.

3.48 4.002 4.6023 5.292645

Question 3 1) A BDT 100 perpetual bond is currently selling for BDT 95. The coupon rate of interest is 13.5 percent
and the appropriate discount rate is 15 percent. Calculate the value of the bond. Should it be bought?
What is yield at maturity?

2) A company proposes to sell ten year debentures of BDT 10,000 each. The company would repay
BDT !,000 at the end of every year and will pay interest annually at 15 percent on the outstanding amount.
Determine the present value of the debenture issue if the capitalization rate is 16 percent.

Question 4 A firm finances all its investments by 40 percent debt and 60 percent equity. The estimated required
 rate of return on equity is 20 percent after-taxes and that of the debt is 8 percent after-taxes. The firm
is considering an investment proposal costing BDT 40,000 with an expected return that will last
forever. What amount (BDT) must the proposal yield per year so that the market price of the share
does not change? Show calculations to prove your point.

Question 5 The X company has the following capital structure on June 30, 2020:
BDT
Ordinary Shares 200,000 4,000,000
10% preference shares 1,000,000
14% Debentures 3,000,000
Total 8,000,000

The share of the company sells for BDT 20. its expected that company will pay next year a dividend of
BDT 2 per share, which will grow at 7 percent forever. Assume a 50 percent tax rate.

You are required to:

a) Compute a weighted average cost of capital based on the existing capital structure.
b) Compute the new weighted average cost of capital if the company raises an additional BDT 20 lakh
debt by using 15 percent debenture. This would result in increasing the expected dividend to BDT 3
and leave the growth rate unchanged., but the price of share will fall to BDT 15 per share.
c) Compute the cost of capital if in (b) above growth rate increases to 10 percent.
 Marks
50

10

s 13.5 percent 5
be bought?

ould repay 8
standing amount.

d required 7
es. The firm

15

a dividend of

BDT 20 lakh
d to BDT 3
1) A BDT 100 perpetual bond is currently selling for BDT 95. The coupon rate of inte
percent,and the appropriate discount rate is 15 percent. Calculate the value of the bo
it be bought? What is yield at maturity?
DT 95. The coupon rate of interest is 13.5
t. Calculate the value of the bond. Should
d at maturity?