Management consultancy by cabrera chapter 20 answer

MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER 20 HYBRID FINANCING: PREFERENCE SHARES, LEASING, OPTIONS, WARRANTS, AND CONVERTIBLES I Questions Capitalizing lease payments means computing the present value of future lease payments and showing them as an asset and liability on the balance sheet The preemptive right provides current shareholders with a first option to buy new shares In this fashion, their voting right and claim to earnings cannot be diluted without their consent The actual owners have the last claim to any and all funds that remain If the firm is profitable, this could represent a substantial amount Thus, the residual claim may represent a privilege as well as a potential drawback Generally, other providers of capital may only receive a fixed amount Preference share is a “hybrid” or intermediate form of security possessing some of the characteristics of debt and ordinary shares The fixed amount provision is similar to debt, but the noncontractual obligation is similar to ordinary shares Though the preference shareholder does not have an ownership interest in the firm, the priority of claim is higher than that of the ordinary shareholder With the cumulative feature, if preference share dividends are not paid in any one year, they accumulate and must be paid in total before ordinary shareholders can receive dividends Even though preference share dividends are not a contractual obligation as is true of interest on debt, the cumulative feature tends to make corporations very aware of obligations to preference shareholders Preference shareholders may even receive new securities for forgiveness of missed dividend payments II Multiple Choice 20-1 Chapter 20 Hybrid Financing: Preference Shares, Leasing, Options, Warrants, and Convertibles B C D D A 11 12 13 14 15 C D A C B 21 22 23 24 25 B B C A B 10 C D D D A 16 17 18 19 20 D D B D A 26 27 28 29 30 D C B A C 31 32 33 34 35 C A C B A Supporting computations: Cost of retained earnings = + g = + 12% D1 P4.48 17.6% I0 P80 where D1 equals the expected dividends one period from today, which is P4.48 (P4 x 1.12); g equals the expected growth rate in dividends and I0 equals the value of the shares = k p = = = 19.15% D1 the expected P9 dividend one period from today (P9), and where D1 equals I0 equals theI0 market rateP47 as in case of a new issue the net proceeds of P47 (P50  P3) 10 Source LT debt PS CE Cost 10% 15% 20% Weight 30 20 50 WAC 03 03 10 16 12 The weighted average cost of capital (WACCAT) is: k0t = W iki (1  Tc) + W eke = 20-2 ½ 9% (1  4) + ½ 18% = 11.7% ... Source LT debt PS CE Cost 10% 15% 20% Weight 30 20 50 WAC 03 03 10 16 12 The weighted average cost of capital (WACCAT) is: k0t = W iki (1  Tc) + W eke = 2 0- 2 ½ 9% (1  4) + ½ 18% = 11.7% .. .Chapter 20 Hybrid Financing: Preference Shares, Leasing, Options, Warrants, and Convertibles B C D D A 11 12 13 14 15 C D A C B 21 22 23 24 25 B B C A B 10 C D D D A 16 17 18 19 20 D D