The capital structure of MSL consists of bonds, preferred shares, and common shares. MSL has outstanding debt

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Question:

The capital structure of MSL consists of bonds, preferred shares, and common shares. MSL has outstanding debt with $120 million face value. The debt matures in 15 years and the annual coupon rate is 6% paid in two semi-annual instalments. The market value of the debt is $1022.5 per $1000 face value. MSL’s corporate tax rate is 25%. MSL has 2.0 million outstanding preferred shares with par value of $25 each but the current market price is $32. Each preferred share pays $4.8 in annual dividends. MSL has 6.999123 million common shares outstanding, and the current share price is $20.06. MSL’s dividend payments over the past 5 years (dividends are usually paid on December 31) are as follows:

Year	2018	2019	2020	2021	2022
Dividends per share	1.06	1.12	1.12	1.15	1.30

a) What is the cost of debt capital? (5 marks) Hint: Given that you have access to a financial calculator or excel, no credit will be given if you use an approximation formula.

b) What is the cost of preferred share capital? (2 marks)

c) What is the cost of common equity capital for MSL? (5 marks) Hint: Find the growth rate per year and then use the arithmetic mean to estimate the growth rate of dividends.