AF0401 – BUSINESS FINANCE
Memo
Solider Ltd is a leading furniture manufacturing company in Papua New Guinea. The Board of Directors
recently passed a resolution of starting a new company Super Furniture Company as a business expansion
plan.
You are appointed as a project manager of the new venture. After a series of discussions with the board
members and senior officers, the following information is finalised with respect to the new project.
The estimated total outlay for the new project is K 600,000 which will be invested systematically in the
form of the plant, equipment and working capital. The projected EBIT is 30 % and the tax rate is 30%.
In order to mitigate the financial stress and achieve an optimum capital structure, the management
decided to have a flexible approach in employing both equity and debt capital with a range of debt-equity
ratios from 0% to a maximum of 50%. The estimated market rate of debt is 9%. It is decided to invite
equity capital for the balance required of the total outlay under each case. The face value of an equity
share is K 100 with a capitalization rate of 12%.
You are expected to submit your calculated values of the proposed capital structure considering three
options of debt-equity ratios of your choice with appropriate recommendations considering the following
scenarios.
i) Determining the book value and the market value of the firm at the different levels of debt-equity ratio
of the capital structure. (8 marks)
ii) Estimating the return on assets and return on equity. (8 marks)
iii) Determining the market price of the shares in each case under Walter’s model. (8 marks)
iv) Evaluate the dividend payout ratio and retention ratio. (8 marks)
v) Discuss the most appropriated dividend policy for the given situation. (8 marks)
vi) Memo format, references, and professionalism. (10 marks)
Assessment Guidelines:
a) Maximum word limits 1500 Words Plus Calculations.
b) The structure of your memo to begin with a (maximum) one-page summary of your technique,
key findings and recommendations. It shall be supported with a maximum of three additional
pages showing input assumptions, calculated values and additional analysis and discussion. Use
suitable table formats for presenting numerical analyses wherever it is preferable.
c) Support your answer with a minimum of five references with an end chapter bibliography.
Answer (1)
Answer:Thanks! I can help you structure and complete this memo. Let's start with a breakdown and plan for your report. Here’s a suggested structure for your memo, based on your brief:---[Page 1: Executive Summary]To: Board of Directors, Solider LtdFrom: [Your Name], Project ManagerSubject: Capital Structure and Dividend Policy for Super Furniture CompanyDate: [Insert Date]Summary of Technique & Assumptions:Total project outlay: K600,000Projected EBIT: 30% of total outlay = K180,000Tax rate: 30%Three capital structure scenarios:Case 1: 0% Debt, 100% EquityCase 2: 25% Debt, 75% EquityCase 3: 50% Debt, 50% EquityCost of debt: 9%, capitalization rate (Ke): 12%Face value of equity share: K100Walter’s model applied for valuationKey Findings (to summarize after calculations):Market and book value variations across scenariosReturns and risk trade-offsShare price behavior under Walter
