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Bachelor of Commerce in Financial Management Corporate Finance Question 1 Bluefield Corporation has 9 million ordinary shares which were issued in a recent initial public offer at a subscription price of R35, 0.5 million 7% preference shares with a par value of R100 in issue and 120000 8.5% semi-annual bonds outstanding, par value R1000 each. The shares currently sell for R34 per share and have a beta of 1.20; the preference shares currently sell for R83 per share; and the bonds have 15 years to maturity and sell for 93% of par. The market risk premium is 10%, T-Bills are yielding 5% and Bluefield’s tax rate is 28%. (a) What is the firm’s book value capital structure? Market value capital structure? Why are the two different? (b) If Bluefield is evaluating a project that has the same risk as the firm’s typical project, what rate should it use to discount the project’s cash flows? (c) If Bluefield is evaluating a project that is riskier that the firm’s typical project, what rate should it use to discount the project’s cash flows? Question 2 Given the following information for Tugela Valley Power Co., find the WACC. Assume the company’s tax rate is 38%; with an 14% market return and 7% risk-free rate. • Ordinary shares: 100 000 shares; with a book value of R20, selling for R63 per share; the beta is 1.10. • Preference share: 18 000 7% preference shares (par value of R120 each), currently selling for R125 per share. • Debt: 5000 8% coupon bonds in issue, R1000 par value, 15 years to maturity, selling at a YTM of 105% per cent; the bonds make quarterly interest payments. Question 3 Brinkman Industries has a debt/equity ratio of 1.5. Its WACC is 12 per cent and its cost of debt 12%. The company tax rate is 28%. (a) What is Brinkman’s cost of equity capital? (b) What would the cost of equity be if the debt equity ratio was 2.0? (c) What if it was 1.0? What if it was 0? (d) Why does the cost of equity change with the debt to equity ratio? Question 4 Maestro ltd currently pays its supplier, Bamboocha ltd, after 65 days. Bamboocha ltd is offering a 3.5% discount if payment is made within 35 days. What would be the annual compound cost of not taking the discount to the nearest percentage point? Assume there are 365 days in a year. Question 5 Your company, Chelini ltd, is planning on getting a new supplier for their stock of baby car seats. In making quotatons from various suppliers to deliver goods on credit, there is need to determine which supplier offers the best terms. The first supplier offers terms of 2/12 net 55; while the second supplier offers terms of 3.5/15 net 65. You anticipate spending R1 000 on this purchase. Required: Do the necessary calculations to decide which supplier your company should go for. Assume a 365-day year.