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  • For Yvone Company: 20M Investment

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    Ramlei Jan G. Rivera
    15 views3 pages
    The document contains calculations to determine the return on investment (ROI) for Yvone Company. It shows the company has $20M in total investment that is split 40% shareholders' equity and 60% liabilities. It then calculates net income after interest and tax expenses to be $2,475,200. The ROI is then calculated as 12.38%. It also contains calculations to determine the cost of preference shares and ordinary shares for Jenny Corporation, finding the cost of ordinary shares at 5.83% is more favorable than the cost of preference shares at 7.69%.

    Original Description:

    Capital Budgeting

    Original Title

    Capital Budgeting

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    The document contains calculations to determine the return on investment (ROI) for Yvone Company. It shows the company has $20M in total investment that is split 40% shareholders' equity and 60% liabilities. It then calculates net income after interest and tax expenses to be $2,475,200. The ROI is then calculated as 12.38%. It also contains calculations to determine the cost of preference shares and ordinary shares for Jenny Corporation, finding the cost of ordinary shares at 5.83% is more favorable than the cost of preference shares at 7.69%.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
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    Download as docx, pdf, or txt
    15 views3 pages

    For Yvone Company: 20M Investment

    Uploaded by

    Ramlei Jan G. Rivera
    The document contains calculations to determine the return on investment (ROI) for Yvone Company. It shows the company has $20M in total investment that is split 40% shareholders' equity and 60% liabilities. It then calculates net income after interest and tax expenses to be $2,475,200. The ROI is then calculated as 12.38%. It also contains calculations to determine the cost of preference shares and ordinary shares for Jenny Corporation, finding the cost of ordinary shares at 5.83% is more favorable than the cost of preference shares at 7.69%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as docx, pdf, or txt
    of 3

    FOR YVONE COMPANY

    Required: Return on Investment

    Return on Investment = Net income / Investment

    40% CA

    20M
    investment
    60% FA

    so

    40% SHAREHOLDERS

    20M Liab &


    Equity

    60% CREDITORS

    To Compute Interest Expense


    20M x 60% = 12M composed of liabilities

    40% SHORT TERM 4,800,000


    12M Liab X 8% = 384,000

    60% LONG TERM 7,200,000


    X 15% = 1,080,000

    To compute for net income

    Net income after interest expense = Net income before tax - Interest expense
    = 5M - (384,000-1,080,000)

    = 3,536,0000

    Net income after tax = Net income after interest (100%-30%)

    = 3,536,0000 (70%)

    = 2,475,200

    ROI = Net income / Investment

    = 2,475,200 / 20,000,000

    = 12.38%

    FOR JENNY CORPORATION

    Required: Favorable alternative

    Cost of Preference Shares

    = Dividends per share / Market value per share of Preference Shares


    = 10 / 130

    = 7.69%

    Cost of Ordinary Shares


    Dividend

    Growth
    = (Expected Cash Dividend Per Share / Current Price Per Share of Ordinary Share) +
    rate

    = (4/120) + 2.5%

    = 5.83%

    The more favorable alternative is the second one, the Cost of Ordinary Shares is lower
    compared to Cost of Preference Shares.

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