In: Accounting
Joy Tours Ltd. and Fun Tours Ltd. Operate in the same
geographical area and are close
competitors. People often find their front offices to be similar
and though both firms have an
official line saying that they respect each other and that they are
inspired by each other’s
business and décor styles, they are simply mirror images of each
other and their financial
records reflect the same as well in terms of an identical EBIT of
$68,000. It is just that while
Joy is fully financed by equity, Fun follows a D/E ratio of 1. Both
firms have assets worth
$650,000 each. The current market interest rate is 8% and both
firms are enjoying a tax holiday
because the government wishes to promote travel and tourism in the
time to come to boost the
tourism sector that has been hit hard by the pandemic. Both Joy and
Fun follow a 100%
dividend payout policy.
You are a young graduate and want to invest some of your funds in
the tourism sector because
a well-wisher has told you that when an industry has hit rock
bottom, up is the only way to go.
According to her, this is the correct time to invest in the tourism
sector now to reap profits when the sector bounces back. With this
view, you invest $48,750 in Joy Tours Ltd. Answer the questions
that follow:
a) What is your proportional ownership in Joy Tours Ltd.? What is
the total cash inflow and rate of return on your investment in Joy
Tours Ltd.?
b) On your well-wisher’s subsequent advice, you decide to switch
your investment to Fun Tours Ltd. Demonstrate how will you be able
to do that without changing your proportional ownership, total cash
inflow and rate of return?
So, There five images uploaded which is solution to the question with explaination
Solution is divided into two sub parts. 1 And 2 page deal with 1 sub part and thereafter half of 2nd image and 3,4,5th images are related to second sub part of solution.