Northland Mining is considering a major Coal mine project in North Queensland, Australia. Costs of financing have
Question:
"Northland Mining" is considering a major Coal mine project in North Queensland, Australia. Costs of financing have been declining recently, and the company's finance department is considering sourcing the capital through debt and equity. Northland Mining's bonds will mature in four years with a total face value of $80 million, paying a half yearly coupon rate of 10% per annum. The yield on the bonds is 15% per annum. The market value for the company's preference share is $6.50 per unit while the ordinary share is currently worth $1.90 per unit. The preference share pays a dividend of $1.10 per share. The beta coefficient for the ordinary share is 1.4. The market risk premium is estimated to be 10% per annum and the risk-free rate is 4% per annum. The company is subject to a 30% corporate tax rate. Below is the recent balance sheet for the company:
Debt:
Bonds:$80 million
Equity:
Preference Shares (100,000 units):$4 million
Ordinary Shares (10 million):$14 million
(a) Calculate the after-tax cost of each of the company's current financing sources listed below:
(i).Bonds
(ii).Preference shares
(iii).Ordinary shares
Fundamental Managerial Accounting Concepts
ISBN: 978-1259569197
8th edition
Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Olds