Question 1. (8 Marks) Part A of this assignment requires an analysis of the following data relating to Bent Ltd: Bent Ltd is considering the purchase of either of two machines which have an initial cost of $600,000 but generate positive net present values. Assume that Bent Ltd has no uncommitted internal funds which can be applied to financing the proposed expansion and replacement program; Bent Ltd will finance any funding shortfall (after the proposed capital restructuring) with new debt. Bent Ltd's cost of equity will remain at 10% after tax, irrespective of changes to its debt ratio (i.e. the ratio of market value of total long-term debt to market value of total long-term funds) - Existing Capital Structure The present capital structure of the company is shown below. The current market value of the company's $1 ordinary shares paid to $0.65 is $0.93. The company's debentures are currently quoted at their nominal value. On the basis of the above market value of ordinary shares the company's cost of equity capital is estimated at 10 per cent. Extract of Bent Ltd's Balance Sheet Proposed Investment Program Bent Ltd is planning to spend $600,000 on restructuring/ expanding. Proposed Changes to Capital Structure The planned expansion program is to be financed partly by calling up the amount uncalled on the $1 ordinary shares. The reaction of the share market to the announcement of the planned expansion is expected to be favourable, and the market price per share is expected to rise to $1.25 per fully-paid share. Cost of equity capital is expected to remain at approximately 10 per cent despite this rise in market value of shares. Repayment of debentures with a total value of $250,000 is due and this is to be met partly from the call of 35c per ordinary share. Any additional debt financing will cost 8%. The current rate of company tax is 30 cents in the dollar. Required Justify your answers to the following questions with full explanations, including, where applicable, itemised schedules of relevant capital structure components. (a) Quantify Bent Ltd's debt ratio before and after the capital restructuring. (b) Quantify Bent Ltd's WACC before and after the capital restructuring. (c) What discount rate would you use to evaluate the investment alternatives offered by the proposed capital expansion program? Justify your answer.