Bill is a CEO at Morgan Company, which is considering expanding its operations.

Morgan Company would like to raise $24 million to invest in capital expenditures. Morgan Company has the following capital structure.

Ordinary shares

The ordinary shares of Morgan Company are currently trading at $2.20 per share on an ex-dividend basis and have a nominal value of $1.00 per share, ordinary dividends are expected to grow in the future by 5% per year and a dividend of $0.20 per share has just been paid.

Preference shares

The 5% preference shares have an ex-dividend market value of $1.20 per share and a nominal value of $1.00 per share. These shares are irredeemable.

Loan notes

The 6% loan notes of Morgan Company are currently trading at $95.45 per loan note on an ex-interest basis and will be redeemed at their nominal value of $100 per loan note in 5 years' time.

Bank loan

The bank loan has a fixed interest rate of 7% per year.

Tax rate

Morgan Company pays corporation tax at a rate of 20%.

Others

The equity beta for Morgan Company is 1.2. The yield on 10-year treasuries is 3% and estimated the market risk premium is 6%.

Please:

1. Calculate the after-tax weighted average cost of capital of Morgan Company on a market value basis using different models

(a) Constant Dividend Growth Model (DGM)

(b) Capital Asset Pricing Model (CAPM)

Transcribed Image Text:

Equity Equity and reserves Ordinary shares Non-current liabilities 5% preference shares 6% loan notes Bank loan Non-current liabilities and Equity $'000 20,000 100,000 20,000 50,000 30,000 $'000 120,000 100,000 220,000 Equity Equity and reserves Ordinary shares Non-current liabilities 5% preference shares 6% loan notes Bank loan Non-current liabilities and Equity $'000 20,000 100,000 20,000 50,000 30,000 $'000 120,000 100,000 220,000

Answer rating: 100% (QA)

Give Equity Equity and reserve 20000000 Ordinary shares 100000 shares Current trading price 220 per ... View the full answer