Question 2: Capital structure and dividend policy. 25marks1.1 The following information relates to two...Question...

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Accounting

Question 2: Capital structure and dividend policy. 25marks
1.1 The following information relates to two companies which tradein a Modigliani and Miller world:
Sanlam Santam
Cost of equity 20% 18%
Cost of debt 12% -
Dividends 200 000 432 000
Interest 150 000 -
Shares 1000 1000
Required:
(a) Calculate the WACC for Sanlam and Santam.
(b) Calculate the correct value for Sanlam shares assuming thatSantam’s shares are correctly valued.
(c) Explain what is meant by the term ‘arbitrage’ with reference tothe M&M theory.
1.2 Suppose Sanlam ltd wishes to finance a major restructuringproject whose total cost is N$75 Million. The company follows aresidual policy on dividends. Earnings for the coming year areexpected to be N$60 Million and the company maintains a debt toequity ratio of 0.5 (50%). An extract from the statements offinancial position is shown below:
Statement of Financial position extract: 2018 2017
Equity: Ordinary shares of N$0.50 each N$5 000 000 N$5 000000

Required:
(a) Calculate the following:
(i) dividend per share;
(ii) the value of additional debt, and
(iii) ordinary share capital to be raised in order to finance therestructuring project.

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Particulars Sanlam Santam Cost of equity 20 18 Cost f debt 12 0 Dividends 200000 432000 Interest 150000 0 Shares 1000 1000 Share Capital Sanlam200000201000000 Santam432000182400000 Debt Fund Sanlam150000121250000 Santam 0 Total Capital Sanlam 1000000 12500002250000 Santam2400000 aWieghted Average of capital Formula Cost of Equity of Equity Cost of debt of debt1t Sanlam Company Cost of EquityGiven 20 of equityEquity ValueTotal Capital 10000002250000044 Cost See Answer

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In: AccountingQuestion 2: Capital structure and dividend policy. 25marks1.1 The following information relates to two...Question 2: Capital structure and dividend policy. 25marks1.1 The following information relates to two companies which tradein a Modigliani and Miller world:Sanlam SantamCost of equity 20% 18%Cost of debt 12% -Dividends 200 000 432 000Interest 150 000 -Shares 1000 1000Required:(a) Calculate the WACC for Sanlam and Santam. (b) Calculate the correct value for Sanlam shares assuming thatSantam’s shares are correctly valued. (c) Explain what is meant by the term ‘arbitrage’ with reference tothe M&M theory. 1.2 Suppose Sanlam ltd wishes to finance a major restructuringproject whose total cost is N$75 Million. The company follows aresidual policy on dividends. Earnings for the coming year areexpected to be N$60 Million and the company maintains a debt toequity ratio of 0.5 (50%). An extract from the statements offinancial position is shown below:Statement of Financial position extract: 2018 2017Equity: Ordinary shares of N$0.50 each N$5 000 000 N$5 000000Required:(a) Calculate the following:(i) dividend per share;(ii) the value of additional debt, and(iii) ordinary share capital to be raised in order to finance therestructuring project.