You are working in the Finance Department of Raceme Manufacturing and your supervisor has asked you to
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Question:
Source of Capital ..................Market Values
Preference Shares ................$2,500,000
Ordinary Shares ....................$5,000,000
To finance the purchase, Raceme Manufacturing will sell 10 year bonds paying interest at a rate of 7 percent per year (with interest paid semiannually) at the market price of $1,050. Preferred stock paying a $2 dividend can be sold for $25. Common stock for Raceme Manufacturing is currently selling for $55 per share, and the firm paid a $3 dividend last year. Dividends are expected to continue growing at a rate of 5 percent per year for the indefinite future. If the firm’s tax rate is 30 percent, what discount rate should you use to evaluate the equipment purchase?
Use the formula sheet at the end of the question paper to answer the below questions.
(a) What is cost of Raceme Manufacturing’s Bonds?
(b) What is Raceme Manufacturing’s cost of preference shares?
(c) What is the cost of Raceme Manufacturing’s ordinary shares?
d) What is Raceme Manufacturing’s WACC?
Related Book For
College Accounting
ISBN: 978-1111528126
11th edition
Authors: Tracie Nobles, Cathy Scott, Douglas McQuaig, Patricia Bille
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