The capital structure of Vermont Machinery Ltd. (VM) contains the following items. Equity: 2,000,000 ordinary shares,...

The capital structure of Vermont Machinery Ltd. (VM) contains the following items. Equity: 2,000,000 ordinary shares, with face value of $1 per share. VM’s ordinary shares are currently trading at $5 per share. The company’s next dividend is estimated to be $0.50. This dividend is expected to grow at 3% per annum forever. The current market required rate of return of the shares is calculated as 13%.
Long-term bonds: 10,000 bonds maturing in 5 years, with a face value of $1000 per bond. The bond has a coupon rate of 6%, which is paid semi-annually. The current market price of a bond is $918.89 and the yield to maturity (the implied market required rate of return) of the bond is 8% per annum.
Preference share: 500,000 preference shares, with a face value $1 per share and paying a 12.5% preference dividend on the face value. Currently, VM’s preference share is trading at $1.25 per share.
Assume VM’s corporate tax rate is 30%. Calculate VM’s after-tax weighted average cost of capital (WACC)

Expert Solution

WACC = 9.47%

jeff jeffy answered 1 week ago

Gidimadjor has the following capital structure GH¢ 000 GH¢ 000 Equity and reserves Ordinary shares 23,000...

Gidimadjor has the following capital structure GH¢ 000 GH¢ 000 Equity and reserves Ordinary shares 23,000 Reserves 247,000 270,000 Non-current liabilities 5% Preference shares 5,000 6 % loan notes 11,000 Bank loan 3,000 19,000 289,000 The ordinary shares of Gidimadjor are currently trading at GH¢ 4·26 per share on an ex dividend basis and have a nominal value of GH¢ 0·25 per share. Ordinary dividends are expected to grow in the future by 4% per year and a dividend of...

Crown Ltd has the following book value capital structure. Equity capital (shares of Rs 10 par...

Crown Ltd has the following book value capital structure. Equity capital (shares of Rs 10 par value each) Rs 15 crore, 12% Preference capital (Rs 100 par value each) Rs 1 crore. Retained earnings Rs 20 crore, 11.5% Debentures (Rs 100 par value each) 10 crore and 11% Term loan Rs 12.5 crore. The next year expected dividend on equity is Rs 3.6 per share and has an expected growth rate of 7%. The market value is Rs 40/share. Preference...

Question 9 (10 marks) Nodebt Ltd has a capital structure of 100% ordinary equity with a...

Question 9 Nodebt Ltd has a capital structure of 100% ordinary equity with a current return on equity of 18%: Its Earnings before Interest and Taxation was $142,857. Nodebt pays tax at the rate of 30%. What is the current market value of Nodebt Ltd? Click or tap here to enter text. What is the Weighted Average Cost of Capital? (2marks) Click or tap here to enter text. What is the market value of Nodebt Ltd after it issues...

Kiwi Helicopters Ltd has a target capital structure of 70% ordinary common shares and 30% debt....

Kiwi Helicopters Ltd has a target capital structure of 70% ordinary common shares and 30% debt. They issued a twenty-year, 5% bond 10 years ago. The bond currently has a yield-to-maturity of 7.5%. The ordinary common shares are currently selling for $45. They have a beta of 1.75 and are expected to pay a $3.25 dividend next year. The firm has a 30% marginal tax rate. The market has an expected return of 12%. Treasury bills are currently paying 2%....

Aide Ltd company has an all equity capital structure of 50,000 shares with a current share...

Aide Ltd company has an all equity capital structure of 50,000 shares with a current share price of $5. The company wishes to raise $250,000 at the current share price of $5 per share or borrow the $250,000 at a cost of 5%. What is the EBIT-EPS indifference point of these two plans? The relevant tax rate is 30%

Choco Company had the following capital structure at January 1, 2018: Outstanding Ordinary shares, 600,000 shares...

Choco Company had the following capital structure at January 1, 2018: Outstanding Ordinary shares, 600,000 shares $7,200,000 10% stated interest rate convertible bonds issued at par; each $1,000 bond is convertible into 80 ordinary shares $5,000,000 During 2018, Choco had the following share transactions: May 1 Issued 50,000 ordinary shares for $30 per share. Sep. 1 Redeemed 100,000 ordinary shares at $35 per share. Nov. 1 Converted $2,000,000 of bonds. Net income for 2018 was $1,900,000. The income tax rate...

ABC capital structure is made up of; CAPITAL STRUCTURE DEBT • Bonds EQUITY • Preference Shares...

ABC capital structure is made up of; CAPITAL STRUCTURE DEBT • Bonds EQUITY • Preference Shares • Ordinary Shares • ABC Ltd. has 120,000 bonds outstanding with a face value of $100 each. These bonds have 5 years to maturity and pay an annual coupon of 7.5%. ABC’s statutory corporate tax rate is 30%. • Moody’s Corporation is one of a big ratings agency which has given ABC Ltd. a debt rating of AAA. The following table shows the current...

2. Arcarde Ltd issues both ordinary shares and preference shares to raise capital, in which 500,000...

2. Arcarde Ltd issues both ordinary shares and preference shares to raise capital, in which 500,000 ordinary shares have been issued at the price of $10 and 100,000 preference shares with a par value of $100. a. Company promises to pay an annual dividend rate of 6.5% per share for its preference shares. If similar investment has a rate of return of 10% p.a, what is the fair price of Arcarde’s preference share? b. Company also plans to pay dividend...

The Capital structure of ABC Ltd, is as under: Equity share capital ₹ 100 Lacs 10%...

The Capital structure of ABC Ltd, is as under: Equity share capital ₹ 100 Lacs 10% Debentures ₹ 50 Lacs The sales for the year 2019 are 1.5 Lac units@ ₹ 40per unit  Also, the variable cost per unit is 20 % of sales revenue  ₹ 12 Lacs is the fixed operating cost.  Assume Income tax rate as 40 % Calculate Operating, Financial and Combined Leverage of the firm and interpret the result.

XYZ Ltd is an all equity company financed by 210,000 ordinary shares which have a market...

XYZ Ltd is an all equity company financed by 210,000 ordinary shares which have a market value of $2.50 per share. The company has earnings before interest and tax (EBIT) of $120,000 and a tax rate of 30%. i. What is the current market value of the company? ii. What is the current cost of ordinary equity (return on equity)? If the company raises $200,000 of long term debt at a cost of 9% and uses the proceeds to retire...

Question