ACC742: The Market Valuation of Ceel Ltd - Case Study - Accounting and Finance Assignment Help

Assignment Task:

Task:

Question 1 (15 marks)
The following information relates to the market valuation of Ceel Ltd, assuming the two different capital structures and using the MM (no tax) approach.

Financed by

Item All Equity Equity and 10% Loan
Earnings before interest ($) 600,000 600,000
Less Interest on loan ($) - 150,000
Equals Earnings available to shareholders 600,000 450,000
Divided by Cost of equity (K e ) 0.15 0.18
Equals Market value of equity 4,000,000 2,500,000
Plus Market value of loan - 1,500,000
Equals Total Market Value of company ($) 4,000,000 4,000,000

Assuming that there are no personal taxes, calculate the total market value of the company for both capital structures, where the company income tax rate is 30 cents in the dollar.

Question 2 (20 marks)
Miller Pty Ltd and Modigliani Pty Ltd are two identical companies with expected earnings (before interest and taxes) of $1.5 million per annum. The only difference between the two companies is that Miller Pty Ltd has issued debt securities to finance the identical activities that Modigliani Pty Ltd has
financed with equity securities alone.
Details of the two companies are as follows:
Item Miller Pty Ltd Modigliani Pty Ltd
Market Value of equity ($) 6,000,000 8,000,000
Market value of debt ($) 4,000,000 Nil

2

Number of shares issued 6,000,000 5,000,000 Cost of debt (k d ) 0.08 Nil

An investor owns 600,000 shares in Miller Pty Ltd.
(a) What is the current market value of the investor’s shares, and what is the investor’s income from Miller Pty Ltd. (10 marks)
(b) Show how the investor can obtain an identical income with a lower net outlay. (10 marks)

Question 3 (40 marks)
Solomon Copra Exporters Ltd used the sources of finance listed in the table below as at 30 June 2020.
Sources of finance Book value ($ millions)
Commercial bills 20.000
Bank Overdrafts 7.368
Bonds 10.000
Preference shares, 8% 2.000
Ordinary shares: issued and paid up, 12,500,000 at 50 cents 6.250

The following information is also provided:

 The commercial bills have a current interest rate of 6.08% p.a. The existing bills mature on 31 st August 2020 but will be replaced by a further issue at that date.

 The interest rate on the bank overdraft is 9.5% p.a., calculated daily and charged to the business account twice per year.

 There are 100 bonds, each with a face value of $100,000 and a coupon rate of 10% p.a., payable on 30 June and 31 December each year. The  onds will be redeemed at their face value on 30 June 2023. On 30 June 2020 the market value of each bond was $102,474.18
 The preference shares are irredeemable with a face value of $2 paying a dividend rate of 8% p.a. Dividends is payable on 30 June and 31 December each year. On 30 June 2020 the market price of each preference share was $1.50 The business pays dividend on its ordinary shares once per year. The latest dividend was 17.5
cents, fully franked, and on 30 June 2020 the market price of each ordinary share was $4.20.
 The business income tax rate is 30%.
Required:
Calculate the cost of capital of Solomon Copra Exporter Ltd

Question 4 (15 marks)

The Tomoko Dredging Company has asked your advice on its dividend policy. There has been only a small change in earnings and dividends over the years and the company’s share price has also been relatively stable during the same period. It has been suggested that the company should expand its activities from dredging into providing services for off-shore oil exploration companies. To undertake the proposed expansion activity the company intends to make a rights issue.

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