Question 4 (7 marks)

The following information is available for capital structure of Algester Ltd:

• 80,000 ordinary shares outstanding at a market price of $102 a share. The company management plans to pay a $9.5 annual dividend next financial year and have a dividend growth rate of 3% annualy.
• 42,000 preference shares with a 9% fixed dividend, outstanding at a market price of $83 a share. The preference shares have a par value of $100.
• The outstanding bonds have a total book value of $4,500,000. The bonds have face value per bond of $1000 and market price of 98.5% of face. The bonds before tax YTM is 7.5%. The corporate marginal tax rate for the company is 30%.

Required:

1. Calculate the current market value (rounded off to the nearest whole number) and capital structure of the Algester Ltd. (rounded off to two decimal places) (2 marks).

ANSWER:

2. Calcualte the cost of each funding source or Algester Ltd. in case the company would like to raise new funds, using dividend constant growth model for calculation the cost of ordinary equity. (2 mark)

ANSWER:

3. Compute the weighted average cost of capital (WACC) under the classical tax system for Algester Ltd. (3 marks)