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SEMESTER Fall 2016 Corporate Finance (FIN622) Assignment No. 1 Due Date: 28-November-2016 Marks: 10

ABC Company Limited estimates that it will need to replace existing production plant 8 years from now. The new production plant can be purchased for Rs.810,404 today. Studies for historical price changes of the production plant suggests to ABC Company’s management that the cost of production plant will rise by approximately 8% per year. The company has paid Rs.5 dividend per share last year and its earnings are expected to grow at the constant rate of 6% annually. There is an average continuous increasing trend of 2% annually in the historical share price of the company. The current market price of ABC Company’s share is Rs.55. The going market interest rate is 7% and is expected to grow at 1% annually. The company has been under the tax bracket of 30% since its inception. The company has following options available to purchase new production plant:
First option:
The company has cash surplus available. If the company sets aside today certain amount of funds from its retained earnings, it can earn 7% compounded annually on any sum it invests today.
Required: 4 marks
How much must be set aside today in order to generate enough funds to purchase the production plant in 8 years.
Second option:
Suppose that 8 years from now, the company has decided to acquire funds for the purchase of production plant by issuing equal amount of equity and debt.
Required: 6 marks
What will be the Weighted Average Cost of Capital (WACC) that company has to pay if it acquires required funds through debt and equity only.

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Replies to This Discussion

Please Solution Put Here

Please discuss assignment here...................

Please Discuss here about this assignment.Thanks

Our main purpose here discussion not just Solution

We are here with you hands in hands to facilitate your learning and do not appreciate the idea of copying or replicating solutions.

if any one gave idea than the solution of this question is very easy

guys share your ideas to find solution.

Please discuss assignment here...................

First Option:

Price of new plant today = R.s 810,404

Price of new plant after 8 years = 810,404 (810,404 x 0.08 x 8) = R.s 1329,062.56

Now to find present value

PV = FV X 1/(1+R)t

 = 1329062.56/(1.07)8

= R.s 773,526.51

is this correct ??

Mr. Xa.A frist part is correct can you share the second option.

its not yet finished. 

yes, Rs 773,526.51 is the amount company must be set aside today. part (a) completed.

part (b): the interest rate of debt is 15%. yes or no? 

should be yes...
if it is growing @ 1%/yr then it should be 15 % after 8 yrs.

WACC is 12.80%
and what is yours @ Sidra Riaz


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