A company is planning to raise GHS 2000000 additional long-term funds to finance its additional capital budget of the current year. The debentures of the company to be sold on a 14% net yield basis to the company, and equity shares to be sold at GHS 50 per share net to the company, are the alternative being considered by the company. The company expects to pay dividend of GHS 5 per share at the end of the coming year. The expansion is expected to carry the company into new higher risk class. The required rate of return on equity from the point of view of the investment community is 16%. i.Determine the growth rate of the company, which the market is anticipating.ii.Management is anticipating 8% growth rate. On this basis, at what price should the equity share be sold by the company?iii.Assuming that management is anticipating growth rate of only 4% per year, would you still recommend equity financing?
A company is planning to raise GHS 2000000 additional long-term funds to finance its
additional capital budget of the current year. The debentures of the company to be sold on a
14% net yield basis to the company, and equity shares to be sold at GHS 50 per share net to
the company, are the alternative being considered by the company. The company expects to
pay dividend of GHS 5 per share at the end of the coming year. The expansion is expected to
carry the company into new higher risk class. The required rate of
point of view of the investment community is 16%.
i.
Determine the growth rate of the company, which the market is anticipating.
ii.
Management is anticipating 8% growth rate. On this basis, at what price should the equity
share be sold by the company?
iii.
Assuming that management is anticipating growth rate of only 4% per year, would you still
recommend equity financing?
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