Ican 2022 Strategic Financial Management Question 5

The directors of Jindadi Plc. (JP), an Abuja-based entertainment company, are currently considering the appropriate cost of capital to use in appraising capital investments. It is the policy of the company to assess the financial viability of all capital projects using net present value criterion. You have been provided with some financial information of the company. Most recent statement of financial position Nm Nm Equity finance Ordinary shares (N1 nominal value) 200 Reserves 120 320 Non-current liabilities 7% Convertible bonds (N 100 nominal value) 160 5% Preference shares (N 1 nominal value) 80 240 Current liabilities Trade payables 80 Overdraft 120 200 Total liabilities 760 JP has an equity beta of 1.2 and the ex-dividend market value of the company’s equity is N1 billion. The ex-interest market value of the convertible bonds is N168 million and the ex-dividend market value of the preference shares is N50 million. The convertible bonds of JP have a conversion ratio of 19 ordinary shares per bond. The conversion date and redemption date are both on the same date in five years’ time. The current ordinary share price of JP is expected to increase by 4% per year for the foreseeable future. The equity risk premium is 5% per year and the risk-free rate of return is 4% per year. JP pays profit tax at an annual rate of 30% per year.