Imaginary Products Ltd finances its assets with bonds, ordinary shares and preference shares. It has 200,000 bonds
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Question:
The company also has an issue of 2 million preference shares outstanding with a market price of $12.00. The preference shares offer an annual dividend of $1.20.
Imaginary also has 14 million ordinary shares outstanding with a price of $20.00 per share. The company is expected to pay a $2.20 ordinary dividend one year from today, and that dividend is expected to increase by 5 per cent per year forever. The corporate tax rate is 30 per cent.
Question a) What is the current price of Imaginary Products' bonds? What is the current total market value of its outstanding bonds? What is the cost of bond financing for the company?
Question b) What is the WACC (Weighted average cost of capital) of this company?
Question c) What would the WACC be if the company bought back half of its ordinary shares (140 million) and issued additional debt of this amount (140 million)? Why would the WACC decrease?
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
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