RST has an optimal capital structure of 45% debt and 55% equity. For the year, t
ID: 2395189 • Letter: R
Question
RST has an optimal capital structure of 45% debt and 55% equity. For the year, the EBIT has a balance of P2,000,000 , 75% ofwhich are allotted for the ordinary equity shareholders. The company's cost of capital is 15%. It has also the following prospective investments Project Proposal Expected investment P 1,200,000 P 500,000 P 350,000 P 450,000 Expected IRR(%) 20% 18% 13% 1696 What projects will constitute the firm's optimal capital budget? If dividends are treated as residual, how much dividends should be paid out to shareholders? Solutions: The projects that will constitute the optimal capital budget are Projects 1,2 and 4 since they IRR is greater than the cost of capital of 15%. These projects need capital requirement of P 2,150,000. P 1,182,500 of this capital requirement will come from equity. The amount of dividends that should be paid out to equity shareholders is P 317,500 [(P2,000,000 x 75%)-P1,182.500].Explanation / Answer
SOLUTION OF QUESTION 1:-
AS PER GIVEN QUESTION THE COST OF CAPITAL OF COMPANY IS 15 % AND EXPECTED IIR FROM PROJECT 1,2,4 IS 20%, 18%, 16% RESPECTIVELY. SO IN THIS CASE PROJECT 1,2,4 IS GIVING HIGHER RETURN FROM THE COMPANY'S COST OF CAPITAL OF 15%.
CALCULATION OF TOTAL CAPITAL REQUIREMENT ARE AS FOLLEW:-
PROJECT 1- P12,00,000 , FOR PROJEST 2 IS P5,00,000 AND FOR PROJECT 4-P4,50,000, SO TOAL CAPIAL REQUIREMENT OF PROJECTS IS-P1200000+P500000+P450000= P2150000
IN THIS CASE TOTAL CAPITAL REQUIREMENT 'S 55% WILL BE COME FROM FROM EQUITY SO THEREFORE AMOUNT IS =P2150000*55/100=P11,82,500
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