2. Your client is also investigating the characteristics of another company, but does not have historical...

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2. Your client is also investigating the characteristics of another company, but does not have historical data for the evaluation process. However, information on the different sources of finance and market prices are available. Your client wishes for you to evaluate this company's current structure in an aim to identify the current returns required for the company. This company has the following balance sheet and details (below): Long-term debt Bonds: Par $100, annual coupon 6% p.a., 9 years to maturity Equity Preference shares Ordinary shares Total $ 50,000,000 5,000,000 20,000,000 75,000,000 Notes: The bank has advised that the interest rate on any new debt finance provided for projects would be 4% p.a. if the debt issue is of similar risk, time to maturity and coupon rate. There are currently 1,000,000 preference shares on issue, which pay a dividend of $0.71 per share. The preference shares currently sell for $4.56. There are currently existing 20,000,000 ordinary shares which sell for $0.88 each. Last year the company paid a dividend of $0.12 per share. Historically, dividends have increased at an annual rate of 5% p.a. and are expected to continue to do so in the future. The company tax rate is currently 30%. Your client requires you to provide full calculations for the market values for each source of capital, the after-tax costs of each source and the weighted average cost of capital (WACC). Further, your client requires a rate of return in excess of 10% p.a. before investing money in the company. Identify, for your client, with a plausible rationale, whether the current WACC (16 marks) is sufficient. 2. Your client is also investigating the characteristics of another company, but does not have historical data for the evaluation process. However, information on the different sources of finance and market prices are available. Your client wishes for you to evaluate this company's current structure in an aim to identify the current returns required for the company. This company has the following balance sheet and details (below): Long-term debt Bonds: Par $100, annual coupon 6% p.a., 9 years to maturity Equity Preference shares Ordinary shares Total $ 50,000,000 5,000,000 20,000,000 75,000,000 Notes: The bank has advised that the interest rate on any new debt finance provided for projects would be 4% p.a. if the debt issue is of similar risk, time to maturity and coupon rate. There are currently 1,000,000 preference shares on issue, which pay a dividend of $0.71 per share. The preference shares currently sell for $4.56. There are currently existing 20,000,000 ordinary shares which sell for $0.88 each. Last year the company paid a dividend of $0.12 per share. Historically, dividends have increased at an annual rate of 5% p.a. and are expected to continue to do so in the future. The company tax rate is currently 30%. Your client requires you to provide full calculations for the market values for each source of capital, the after-tax costs of each source and the weighted average cost of capital (WACC). Further, your client requires a rate of return in excess of 10% p.a. before investing money in the company. Identify, for your client, with a plausible rationale, whether the current WACC (16 marks) is sufficient.

Answer rating: 100% (QA)

Bonds Longterm Debt Coupon Payment Par Value Coupon Rate 100 6 6 per bond Present Value of Bond Coupon Payment 1 1 Interest RateNumber of Years Intere... View the full answer