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(solution) Analyze the following two cases and gave your suggestions with


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Analyze the following two cases and gave your suggestions with all necessary calculations.

 

Case: 01

 

Syntax Corporation has the following capital structure:

 

Debentures = $ 3.26 Billion

 

Common shares = $ 6.52 Billion

 

Total = $ 9.78 Billion

 

The corporation has no preferred stocks in its capital structure. Under the prevailing

 

market conditions, financial analysts have estimated a return of 13% p.a for common share

 

of the corporation. Debentures carry an interest rate of 9.5%. Corporate tax rate is 39%.

 

What weighted average cost of capital would you suggest for the corporation. Your

 

suggestion should be supported by all necessary calculations. (5) Case: 02

 

Pak beverages limited deals in the production and distribution of cold drinks. To expand its

 

distribution channel, management of the company decided to renovate its ware house

 

distribution system through out the country. Feasibility report of the project shows that the

 

project will cost $ 150 million and would save $ 40 million per year after taxes over the next

 

7 years.

 

The company has a target debt ? to ? equity ratio of ¼. The equity and debt finances will

 

cost the company 24% and 13% respectively. The tax rate is 32%.

 

Analyzing the above data, would you suggest to the management of the company to go for

 

the project. Your suggestion should be supported by all necessary calculations. (5)

 


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