The Board of Directors of Nyanguli Plc is discussing whether to alter the
company’s capital structure. Corporate registration permits Nyanguli Plc to
repurchase its own shares and it is proposed to issue TZS.5 billion of new
debentures at par, and use the funds to repurchase ordinary shares.
A summary of Nyanguli’s current Statement of Financial Position as at
31st December 2022 is as follow:
TZS. ‘Million’
Non-current assets (net) 24,500
Current assets 12,300
Current liabilities (8,600)
28,200
Financed by
Ordinary shares (par value TZS.25) 4,500
Reserves 14,325
18,825
5% debentures (redeemable at par in ten years’ time) 9,375
28,200
The company’s current ordinary share price is TZS.167 and its debenture price is
TZS.80 per TZS.100. Nyanguli’s Finance Director does not expect the market price
of the existing ordinary shares or debentures to change as a result of the proposed
issue of new debentures. Debenture interest is payable at the end of each year. Issue
costs and transactions costs may be assumed to be negligible. Nyanguli’s cost of
equity is estimated by a leading firm of stockbrokers to be 17%.
REQUIRED:
(i) With supporting assumptions and calculations, evaluate the likely effect on
the weighted average cost of capital of Nyanguli Plc if the company
restructures its capital under the assumption of no corporate tax and under
the assumpting of a 35% corporate tax. (8