Alibaba Corporation has the following capital structure, which is considered to be optimal: Source Weight Ordinary Shares 40% Preferred Shares
Alibaba Corporation has the following capital structure, which is considered to be optimal: Source Weight Ordinary Shares 40% Preferred Shares 35% Debt 25% Total 100% Alibaba's expected net earnings this year is $65,350. The company's established dividend payout ratio is 25%. Alibaba paid a dividend of $2.50 per share on its 80,000 issued ordinary shares. Investors expect earnings and dividends to grow at a constant rate of 9% in the future. Alibaba shares are currently trading at a price of $50 per share. Corporate tax rate is 30%. Alibaba could obtain new capital in the following ways: Preferred shares: Issue 35,000 new preference shares with a dividend of $10 per share. The preference share market price is currently $100 per share. Debt: Issue 2,500 fifteen years $1,000 par value bonds to the public. The bonds will pay 12% coupon annually and have a current yield-to-maturity of 12% per annum.
A. Determine the cost of each source of funds.
B. Calculate the weighted average cost of capital.
C. An investment opportunity offers the rate of return of 12.11%, explain if Alibaba should accept this investment opportunity or not.