Assignment Tasks
Task 1: Current Capital Structure Analysis
Debt, Equity, and Hybrid Components:
Debt: Represents borrowed funds such as loans or bonds.
– Example: A business takes a loan of $1 million to expand its production
capacity and agrees to repay it in monthly installments at a predetermined
interest rate.
Equity: Ownership interest in the company, such as common or preferred stock.
– Example: A business issues common stock to raise capital. If there are 1,000
shares outstanding and an investor owns 100 shares, they hold 10% of the
company.
Hybrid Instruments: Financial instruments that blend characteristics of debt
and equity.
– Convertible Bonds: Debt instruments that can be converted into common
shares.
* Example: A bond with a face value of $1,000 and a conversion ratio of
50:1 allows conversion into 50 shares.
– Convertible Preferred Stock: Preferred stock with fixed dividends that can be
converted into common shares.
* Example: A company issues preferred stock with a 5% dividend, which
can be converted into common stock for capital gains.
Weighted Average Cost of Capital (WACC):
E D
WACC = × Re + × Rd × (1 − Tc ) (1)
V V
Data from Mama Flo Boutique:
Re = 5% = 0.05
Rd = 4% = 0.04
E = Kshs. 870, 000
D = Kshs. 190, 000
Tc = 20% = 0.20
V = E + D = Kshs. 1, 060, 000
1
Task 1: Current Capital Structure Analysis
Debt, Equity, and Hybrid Components:
Debt: Represents borrowed funds such as loans or bonds.
– Example: A business takes a loan of $1 million to expand its production
capacity and agrees to repay it in monthly installments at a predetermined
interest rate.
Equity: Ownership interest in the company, such as common or preferred stock.
– Example: A business issues common stock to raise capital. If there are 1,000
shares outstanding and an investor owns 100 shares, they hold 10% of the
company.
Hybrid Instruments: Financial instruments that blend characteristics of debt
and equity.
– Convertible Bonds: Debt instruments that can be converted into common
shares.
* Example: A bond with a face value of $1,000 and a conversion ratio of
50:1 allows conversion into 50 shares.
– Convertible Preferred Stock: Preferred stock with fixed dividends that can be
converted into common shares.
* Example: A company issues preferred stock with a 5% dividend, which
can be converted into common stock for capital gains.
Weighted Average Cost of Capital (WACC):
E D
WACC = × Re + × Rd × (1 − Tc ) (1)
V V
Data from Mama Flo Boutique:
Re = 5% = 0.05
Rd = 4% = 0.04
E = Kshs. 870, 000
D = Kshs. 190, 000
Tc = 20% = 0.20
V = E + D = Kshs. 1, 060, 000
1
