Bowrah Brewery Ltd (Bowrah) is planning to launch a new product of fresh beer to the market. This project requires an initial investment in equipment and net working capital of $850,000. The finance team has completed the estimation of future cash flows generating from this new product and has asked you to compute a discount rate to use in assessing the viability of the project. Information about Bowrah's capital structure is as follows:

• Bowrah currently has 600 corporate bonds outstanding. This bond has a face value of $1,000, coupon rate of 5% p.a paid semi-annually have a maturity of 10 years, and a yield to maturity of 6% p.a
• The preference share is traded at $8 per share paying a fixed dividend of $0.96 per share annually. There are 120,000 preference shares outstanding in the market
• The ordinary shares are selling at $25 with 100,000 shares outstanding. Assuming that the Treasury bond's rate is 2%, the market risk premium is 8.5% and Bowrah's beta is 0.96.
• Company's tax rate is 30% and the finance manager aims to maintain the current capital structure in the new project.

Questions

1. Calculate the weight of each source of capital in current capital structure

2. Calculate the total value of debts, preference shares and ordinary shares to be issued to finance the new project.

3. Calculate after-taxed cost of debt, after-taxed cost of preference shares and after-taxed cost of ordinary share.

4. Calculate Bowrah's after-taxed Weighted Average Cost of Capital (WACC)

5. Bowrah has recently paid a dividend of $2 per share. The company expects to maintain a stable growth rate of 4% in a foreseeable future. Based on this information, re-calculate the cost of equity and after-tax WACC.

Answer rating: 100% (QA)

1 To calculate the weight of each source of capital in the current capital structure we need to determine the proportion of each source relative to the total capital structure a Bonds The face value o... View the full answer