Question $2(20$ marks$)$

Suppose you were newly recruited Financial Assistant of MOTO Co$.$ Ltd which mainly

produces and sells new electric vehicles. After reporting duty on the first working day, you

received the following information from your boss.

Capital Structure:

Common Stock: $15\mathrm{.}6$ million shares outstanding, with a par value of $$10$ per share, and a

market price of $$246$ per share. The stock has a beta of $0\mathrm{.}65.$

Preference Stock: $1\mathrm{.}2$ million shares of $4\mathrm{.}8$ percent preferred stock outstanding, with a par

value of $$100$ per share, and a current market price of $$106$ per share.

Debt: $2\mathrm{.}8$ million of $10-$year bonds were issued $2$ year ago and with a $5\mathrm{.}6$ percent coupons

outstanding. The bonds make semiannual payments and currently trade for $106$ percent of

its face value.

Market Information:

The current risk$-$free rate is $4\%$

The expected market return is $8\mathrm{.}9\%.$

The company's tax rate is $25\%$

$($a$)$ Compute the cost of equity $(R_E)$ using CAPM and cost of preferred stock $(R_P).$ You're your

workings. $[$Answers in $\%$ with $2$ decimal places$]$

$(4$ marks$)$

$($b$)$ Compute the pre$-$tax cost of debt $(R_D)$ using the interpolation method. Show your workings.

$[$Hint: Use approximate YTM $+/-0\mathrm{.}2\%].[$Answers in $\%$ with $2$ decimal places$](6$ marks$)$

$($c$)$ Based on your answer in part $($a$)$ and $($b$),$ compute the weighted average cost of capital

$($WACC$)$ of the company according to the current capital structure. Show your workings.

$[$Answers in $\%$ with $2$ decimal places$]$

$(6$ marks$)$

$($d$)$ If MOTO Co$.$ Ltd is evaluating a new investment project that is risker than the company as

a whole and it should use an adjustment factor of $+0\mathrm{.}25$ percentage. What is the discount

rate it should be use for the project? Support your explanation with calculation. $[$Answers

in $\%$ with $2$ decimal places$]$

$(4$ marks$)$