Reference no: EM132977566
Question - Universe Corporation wishes to compute a weighted average cost of capital for use in evaluating capital expenditure proposals. Earnings capital structure and current market price of the company s securities are:
EARNINGS:
Earnings before interest and income tax 210,000
Interest expense in bonds 30,000
Pre-tax earnings 180,000
Income tax (45% tax rate) 81,000
After tax earnings 99,000
Preference share dividends 24,000
Earnings available to ordinary shareholders 75,000
Ordinary share dividends 30,000
Increase in retained earnings 45,000
CAPITAL STRUCTURE:
Mortgage bonds 10%, 10 years 300,000
Preference share 12%, P100 par value 200,000
Ordinary share, no par, 50,000 shares outstanding 350,000
Retained earnings (equity of ordinary shareholders) 150,000
1,000,000
MARKET PRICES OF THE COMPANY S SECURITIES:
Preference share P96
Ordinary share 10
Bonds 105
Required -
1. Determine the weighted average cost of capital.
2. Using your computed weighted average cost of capital in number 1 above, decide whether the following proposed investment proposals, given their expected return on investment, would be accepted?
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