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 day ago

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