Q1. Cotton On Ltd. currently has the following capital structure:

Debt: $3,500,000 par value of outstanding bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 12%. The bond issue has face value of $1,000 and will mature in 20 years. Ordinary shares: $5,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan just paid a $8.50 dividend per share. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. Preferred shares: 45,000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 12%. The firm's marginal tax rate is 30%. Required:

a) Calculate the current price of the corporate bond? (4 marks)

b) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 9%? (3 marks)

c) Calculate the current price of the preferred share if the average return of the shares in the same industry is 10% (3 marks)

Q2. Giant Machinery Ltd is considering to invest in one of the two following Projects to buy a new equipment. Each project will last 5 years and have no salvage value at the end. The company's required rate of return for all investment projects is 9%. The cash flows of the projects are provided below. Project 1 Project 2 Cost $175,000 $185,000 Future Cash Flows Year 1 Year 2 Year 3 Year 4 Year 5 76,000 83,000 67,000 65,000 55,000 87,000 78,000 69,000 65,000 57,000 Required:

a) Identify which project should the company accept based on NPV method. (4 marks) (Note: Please round up the result of each calculation of PV to 2 decimal places only for simplification)

b) Identify which project should the company accept based on simple pay back method if the payback criteria is maximum 2 years. (4 marks)

c) Which project Giant Machinery should choose if two methods are in conflict. (2 marks)