Exam (elaborations) SCIENCE AND TECHNOLOGY487

(a) Suppose NUST Ltd issued at par bonds with a10- year maturity, a $1 000 par value, a 10% coupon rate and semi-annual interest payments. Two years after the bonds were issued, the interest rate on similar risk bonds fell to 6%. At what price should the bonds sell? [5] (b) i. Ndlovu Brothers is expected to pay a $0.50 per share dividend at the end of the year [i.e. $0.50 D1 = ]. The dividend is expected to grow at a constant rate of 7% a year. The required rate of return on the stock, , is 15%. What is the value per share of the company’s stock? [2] Ke ii. What are the limitations of the model you have used. [4] (c ) Briefly discuss the advantages and disadvantages of going public. [9] QUESTION TWO [20 MARKS] (a) NUST Ltd has the following capital structure, which it considers to be optimal: Debt 25% Preferred Stock 15% Common Stock 60% 1 Total Capital 100% NUST Ltd`s tax rate is 40% and investors expect earnings and dividends to grow at a constant rate of 9% p.a in the future. NUST paid a dividend of $3,600 per share last year and its stock currently sells at a price of $60 000 per share. Treasury bonds yield is 11%, an average stock has a 14% expected rate of return and NUST`s beta is 1.51. These terms would apply to the new security offerings: Preferred: New preferred stock could be sold to the public at a price of $100 000 per share, with a dividend of $11 000. Flotation costs of $5 000 per share would be incurred. Debt: Debt could be sold at an interest rate of 12% after floatation costs. (i) Find the component costs of debt, preferred stock and common stock. [6] (ii) What is the Weighted Average Cost of Capital [WACC]? [2] (b) Discuss the critical assumptions of MM`s propositions on capital structure. [12] QUESTION THREE [20 Marks] (a) Explain the theories of investor preference. [9] (b) Explain the main factors that influence dividend policy. [10] (c ) Demonstrate the Pecking-Order Theory of Corporate Financing [1] QUESTION FOUR [20 Marks] Discuss the theoretical explanations to recent mergers and acquisitions in Zimbabwe. QUESTION FIVE [20 Marks] Examine any four cash management techniques that a firm can employ in its working capital management. 2 QUESTION SIX [20 Marks] (a) Assuming that annual lease payments are made in advance and that there is no residual value: i. What is the annual lease payment if purchase price, is $92 000, an implicit interest rate of 22%, and a 6 year lease period respectively. [5] ii. What is the implied interest rate if, a purchase price of $420 000, a 5- year lease period, and an annual lease payment of $94 060 respectively. Solve for the implied interest rate. [5] (b) Distinguish the following terms : i. Financial lease and Operating lease. [2] ii. Full-service [or maintenance] lease and Net lease. [2] 3 (c ) “A lessee does not have to pay to buy the leased asset” What is the implied risk in such a lease contract.