Question

In: Finance

On 31 December 2018, The Hiya Magazine company reported the composition of their source of capital...

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:

  1. How does capital structure of the company affect its cost of capital? (4%)

  2. Calculate the after-tax cost of capital of the bank loan! (3%)

  3. Calculate the after-tax cost of capital of the company bonds! (3%)

  4. Calculate the cost of capital of company preferred shares! (3%)

  5. Calculate the cost of capital of company common shares! (3%)

  6. Calculate the company weighted average of cost of capital (WACC)! (5%)

  7. How does company use the WACC for? (4%)

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