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Financing and Investment Policy Differences

1. Advise the difference between financing and investment policies in working capital management and in each case provide an example to illustrate the answer.

2. Please note that R on teh below statement stands for South African rand known as ZAR.

Mxolisi LTD has a total equity of R500,000. The market risk premium required by the shareholder's is 5.5% and the yield on government bonds is currently 7.5%. Mxolisi Ltd has issued debentures with par value of R100 and an interest raet of 8%. Mxolisi Ltd als has R100 preference shares that are trading at R96 per share in preferece dividends. The tax rate is 30%. The value of the preference shares is R300,000 and the valeu of the debentures is R200,000.

Calculate the following for Mxolisi Ltd and show each step startign with the formula used:
i) Cost of equity
ii) After-tax cost of debt
iii) Cost of preference shares
iv) Weighted average cost of capital

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Question 1
Financing policies in working capital management are highly dependent on the capacity of the firm to convert its inventories into cash. This is so because this cash will be used to pay whenever current liabilities become due. On the other hand, investment policies in working ...

Solution Summary

The expert describes the differences in financing and investment policies.