You have just started working as a financial advisor for LAE Aeronautical Ltd. On your first day
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Question:
You have just started working as a financial advisor for LAE Aeronautical Ltd. On your first day of work, your boss provides you with the following details regarding the capital structure of the company as in the book-value balance sheet:
Liabilities | $ |
Short-term loans payable (interest rate 5% p.a. compounded quarterly) | $20 million |
1500 corporate bonds (the face value of each is $100,000) | $150 million |
Shareholders' equity | |
Common stock (12 million shares, issued at $25 each) | $300 million |
Preferred stock (2 million 7% shares, issued at $35 each) | $70 million |
- These corporate bonds pay semi-annual coupons at a rate of 6% per annum and will mature exactly 10 years from today. The current yield to maturity on these bonds is 8% per annum.
- The current price of a common share is $28. The company is expected to pay a dividend of $1.8 per share next year and maintain the same annual dividend payment of $1.8 per share in perpetuity.
- The market price of a preference share is $40.
- The company tax rate is 30%.
a. Calculate the after-tax weighted average cost of debt for LAE Ltd. (4 marks)
b. Calculate the weighted average cost of equity for LAE Ltd. (4 marks)
c. Calculate the after-tax weighted average cost of capital for LAE Ltd. (2 marks)
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