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Questions -
Q1. Sam is the owner and managing director of Nice Trading Ltd., a popular SME involved in Importing second hand clothing. The company has recently been assessing its capital structure so it can finance its' business growth sustainably. With the help of its accountants, the company has set a target capital structure of 40% ordinary shares, 20% preference shares and the balance as debt finance. Sam's ordinary shareholders expect 15% return, the preference shareholders expect 7% return and the cost of debt is estimated at 8%. The relevant tax rate is 20%.
i. Calculate the WACC for Sam's Trading Ltd.
ii. Based on your answer in (a) above, briefly outline one decision that can be made by: a. Sam; b. A potential Investor.
Q2. Based on WACC and discussions with his accountant, Sam decides to invest in a new storage container since the existing 15-year container has started giving some minor problems. This new investment will cost Sam's Trading Ltd. $60,000 and is expected to generate after tax-cash flows of $12,000 per year for five years. The new container will be sold at the end of 5 years for $20,000 after tax. Provide relevant calculations to justify whether Sam's Trading Ltd. should invest in this project.
Identify and discuss the key steps in the closing process that provide the most opportunity to make mistakes in processing account transactions.
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