In: Finance
On 31 December 2018, The Hiya Magazine company reported the composition of their source of capital as presented in the following table:
Source of capital |
Amount ($) |
Bank loan (interest 10%) |
200,000 |
Bonds (coupon rates 12%, will be matured in 3 years, the current YTM is 13%) |
450,000 |
Preferred shares (9%, par value $100) |
175,000 |
Common (Ordinary) shares (par value $10, the last dividend paid was $3.5 per share) |
575,000 |
Total capital |
1,4000,000 |
The company is in 25% marginal tax rate and its dividend grows by 5% yearly. Currently, company preference shares and common shares are traded at $115 and $23, respectively.
Ques tion:
How does capital structure of the company affect its cost of capital? (4%)
Calculate the after-tax cost of capital of the bank loan! (3%)
Calculate the after-tax cost of capital of the company bonds! (3%)
Calculate the cost of capital of company preferred shares! (3%)
Calculate the cost of capital of company common shares! (3%)
Calculate the company weighted average of cost of capital (WACC)! (5%)
How does company use the WACC for? (4%)