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The Kanaks Bhd has the following capital structure in 2012:

RM’ 000

1 m Ordinary shares of RM1 each

1,000

400,000 Preference shares of RM0.50each

200

7% Redeemable Debentures RM1 each

200

Total

1,400

Additional Notes:

The ordinary shares have a current market value of RM1.20 pershare, and a dividend of RM0.06 per share has just been paid.Dividend growth is expected to be at a rate of 12% per year.

The preference shares have a current market value of RM0.60 pershare and the rate of dividend is 8%.

The redeemable debentures have a coupon rate of 7% and a currentmarket price

of RM94 per RM100 block. These areredeemable in 8 years time.

4. Corporation tax rate is to be taken as 30%

Required:

a.

Calculate the weighted average cost ofcapital for Kanaks Bhd using market

values

b.

Explain why it is considered preferableto use market values rather than

book values when making thiscalculation.

c.

Discuss the importance of gearing to apotential investor in some ordinary shares in

Kanaks Bhd.

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Hubert Koch
Hubert KochLv2
28 Sep 2019

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Related questions

La Sfera Co. was formed on July 1, 2014. The company reportedthe following summarized statement of financial position at July 1,2017:

RM

Assets

Cash

472,000

Other assets

1,680,000

Total assets

2,152,000

Liabilities and Equity

Liabilities

Other liabilities

546,000

Ordinary dividend payable

35,000

Shareholders’ equity

7% preference shares, 300,000 authorised, 50,000 issued

250,000

Ordinary share, 500,000 authorised, 250,000 issued

750,000

Retained earnings

571,000

Total liabilities and equity

2,152,000

The following transactions occurred during the financial yearbut have not been recorded:

July 1, 2016

Paid dividends payable to shareholders.

Aug 15, 2016

Issued 50,000 ordinary shares to the public for RM5 per share.The company incurred RM4, 000 on the costs of issuance ofshares.

Nov 23, 2016

Offered right issue to existing shareholders, with the right topurchase one shares for every 80 shares held. Market price on thedate was RM5. All offers were taken up.

Feb 1, 2017

Obtained a 6-month loan amounting RM 25,000 from JuneBank at 4%per year to expand the business.

Mar 7, 2017

Declared and distributed one-for-fifty share dividend toshareholders on record. Market value per share was RM6. The companyused its retained earnings for the purpose of giving bonusshare.

May 18, 2017

Declared cash dividend to ordinary shareholders of RM0.20 pershare, subject to approval at the forthcoming annual generalmeeting.

June 1, 2017

Issued 10% three-year bonds payable with a RM150, 000 par valueat the price of RM133, 540. The current market interest rate is12%.

June 30, 2017

Payment of cash dividend to ordinary shareholders has beenapproved. The money will be credited to ordinary shareholders inJuly 15, 2018.

Paid preference dividend.

Required:

Journalise the above transactions.

Prepare the statement of financial position as at December 31,2017.

Question 3 (50 marks)
The following information is available for Heritage Limited:
1. The reporting period of Heritage Ltd ends on 30 June of every year.
The following balances are available as at 30 June 20x8
Land and building at cost 400 000
Accumulated depreciation on buildings at 01/07/20x7 12 000
Furniture at cost 80 000
Accumulated depreciation as at 01/07/20x7 10 000
Vehicles at cost 300 000
Accumulated depreciation as at 01/07/20x7 60 000
Investments as at 01/07/20x7 34 000
Bank 96 700
Trade and other receivables 20 000
Ordinary share capital 275 000
Preference share capital 280 000
Retained earnings as at 01/07/20x7 7 000
Replacement reserves 58 250
10% Bank loan 100 000
Payables 33 500
Additional information:
1. The buildings are occupied for the purposes of the activities of the entity and are accounted for in terms of the cost model. At the date of acquisition, 01 July 20x6, the land was valued at N$ 100 000 and buildings at N$ 300 000. Depreciation is written off on buildings at 4% per annum on the straight line method.
2. Furniture and vehicles were purchased on 01 July 20x6 at N$ 80 000 and N$ 300 000 respectively. Depreciation is written off on furniture at 12,5% per year on cost and on
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vehicles at 20% per year on the diminishing balance method. The necessary write-offs for the current year still need to be done.
3. The value of the investments is valued at N$ 42 000 as at 30 June 20x8
4. Inventories consist as at 01 June 20x8 amounted to N$ 22 000. Inventories are measured at lower of cost (FIFO) and net realisable value.
5. Authorised share capital for Heritage Ltd is 400 000 ordinary shares at N$ 1,10 each and 200 000 8% preference shares at N$ 1,75 each. The company had already issued 250 000 ordinary shares at N$ 275 000 and 160 000 preference shares at N$ 280 000. The company had issued 25 000 shares at N$ 2,00 during the year. Preference share capital form part of equity.
6. The loan was entered into on 01 July 20x6 at an interest rate of 10% per annum. The loan is secured by a mortgage bond on land and buildings and is repayable in annual instalments of N$ 20 000 from 31 December 20x8.
7. Payables consist of the following:
Trade payables 6 000
Namibian company tax 3 000
Dividend payable 24 500
8. Profit for the year amounted to N$ 60 000.
9. On 30 March 20x8 a new vehicle with a cost price of N$ 55 000 was purchased for use in the delivery of goods to customers.
10. At 30 June 20x8, inventory worth N$ 4 000 were stolen.
Required:
1.1 Prepare the statement of financial position as at 30 June 20x8 to comply with the requirements of IFRS and Companies Act,
1.2 Prepare the following notes to accompany the financial statements and to comply with IFRS and Companies Act:
? Basis of presentation
? Statement of significant accounting policies
? Property, plant and equipment
? Financial assets
? Inventories
? Share capital and
? Non-current liabilities as at 30 june20x8; and
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1.3 The statement of changes in equity for the year ended 30 June 20x8 for Heritage Ltd to comply with the minimum requirements of the Companies Act of 2008 and International Financial Reporting Standards (IFRS). Comparative figures are required were necessary

Question 3 (50 marks)
The following information is available for Heritage Limited:
1. The reporting period of Heritage Ltd ends on 30 June of every year.
The following balances are available as at 30 June 20x8
Land and building at cost 400 000
Accumulated depreciation on buildings at 01/07/20x7 12 000
Furniture at cost 80 000
Accumulated depreciation as at 01/07/20x7 10 000
Vehicles at cost 300 000
Accumulated depreciation as at 01/07/20x7 60 000
Investments as at 01/07/20x7 34 000
Bank 96 700
Trade and other receivables 20 000
Ordinary share capital 275 000
Preference share capital 280 000
Retained earnings as at 01/07/20x7 7 000
Replacement reserves 58 250
10% Bank loan 100 000
Payables 33 500

Additional information:
1. The buildings are occupied for the purposes of the activities of the entity and are accounted for in terms of the cost model. At the date of acquisition, 01 July 20x6, the land was valued at N$ 100 000 and buildings at N$ 300 000. Depreciation is written off on buildings at 4% per annum on the straight line method. 2. Furniture and vehicles were purchased on 01 July 20x6 at N$ 80 000 and N$ 300 000 respectively. Depreciation is written off on furniture at 12,5% per year on cost and on


Page 13 of 21

vehicles at 20% per year on the diminishing balance method. The necessary write-offs for the current year still need to be done. 3. The value of the investments is valued at N$ 42 000 as at 30 June 20x8 4. Inventories consist as at 01 June 20x8 amounted to N$ 22 000. Inventories are measured at lower of cost (FIFO) and net realisable value. 5. Authorised share capital for Heritage Ltd is 400 000 ordinary shares at N$ 1,10 each and 200 000 8% preference shares at N$ 1,75 each. The company had already issued 250 000 ordinary shares at N$ 275 000 and 160 000 preference shares at N$ 280 000. The company had issued 25 000 shares at N$ 2,00 during the year. Preference share capital form part of equity. 6. The loan was entered into on 01 July 20x6 at an interest rate of 10% per annum. The loan is secured by a mortgage bond on land and buildings and is repayable in annual instalments of N$ 20 000 from 31 December 20x8. 7. Payables consist of the following:
Trade payables 6 000
Namibian company tax 3 000
Dividend payable 24 500
8. Profit for the year amounted to N$ 60 000. 9. On 30 March 20x8 a new vehicle with a cost price of N$ 55 000 was purchased for use in the delivery of goods to customers. 10. At 30 June 20x8, inventory worth N$ 4 000 were stolen.

Required:
1.1 Prepare the statement of financial position as at 30 June 20x8 to comply with the requirements of IFRS and Companies Act,
1.2 Prepare the following notes to accompany the financial statements and to comply with IFRS and Companies Act:
? Basis of presentation ? Statement of significant accounting policies ? Property, plant and equipment ? Financial assets ? Inventories ? Share capital and ? Non-current liabilities as at 30 june20x8; and


Page 14 of 21

1.3 The statement of changes in equity for the year ended 30 June 20x8 for Heritage Ltd to comply with the minimum requirements of the Companies Act of 2008 and International Financial Reporting Standards (IFRS). Comparative figures are required were necessary.

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