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Explanations of the following concepts of valuation of security
(i) Going concern value is the value of a company assuming it will continue operating for the foreseeable value.
(ii) Liquidation value is the value of the business assuming it will stop operating.
(iii) Intrinsic value is the true value or worth of a security. It’s the total present value of all future cash flows to be received from that security
francis1897 answered the question on November 7, 2022 at 09:31
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Galaxy Ltd. are considering undertaking an expansion programme which is expected to cost sh.20 million. The expansion will be a diversification from their mainstream activities into the mining industry.
The firm’s capital structure which is considered optimal is given as follows:
Sh. "000
Equity capital 80,000
Long term debt 20,000
100,000
Additional information:
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2. New ordinary shares can be issued at a price of sh.50 each. A floatation cost of sh.5 per share will be incurred. The most recent dividend paid by the firm was sh.2. This is expected to grow at the rate of 5% each year in perpetuity.
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Required:
(i) The cost of retained earnings.
(ii) The after-tax cost of 8% debentures.
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Date posted: November 7, 2022. Answers (1)
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Date posted: November 7, 2022. Answers (1)
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Year ...(Solved)
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Cash flows
Year Sh.
0 -100,000
1 20,000
2 30,000
3 40,000
4 50,000
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Additional information:
1. The cost of capital is 12% per annum
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Required:
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Date posted: November 7, 2022. Answers (1)
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Sh. "000"
Ordinary share capital 60,000
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10% debentures 25,000
8% preference share capital 15,000
120,000
Additional information:
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Date posted: November 7, 2022. Answers (1)
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The forecasted rate of return from investment in securities X and Y over the next 5 years are as follows:
Forecasted returns (%)
Year Security X Security Y
2022 10 12
2023 12 8
2024 8 13
2025 15 11
2026 10 6
Required:
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(ii) The standard deviation of returns of security X and security Y.
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Date posted: November 1, 2022. Answers (1)
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Project Initial cash outflows Cash inflows
Sh. "000" Sh. "000"
Year 1 Year 2 Year 3
A (8,000) 2,000 4,000 6,000
B (10,000) 4,000 6,000 6,000
C (20,000) 8,000 12,000 10,000
Additional information:
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Date posted: November 1, 2022. Answers (1)
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Probability Forecasted returns
A (%) B (%)
0.15 10 8
0.20 12 10
0.10 8 7
0.15 15 12
0.25 14 10
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