Your brother has just started a new business and has asked you to help him determine his WACC
 

Information available includes the following:

 Preference Shares:

 

The preference shares were issued for $200 with a 10% dividend. The current market price is $120. There are 6 million shares on issue.

 Debt:

 

The debt that the firm has issued was issued 5 years ago and has 5 years left to maturity. The bonds pay monthly coupons of 6% pa. The bonds were issued for $1000 each and are currently valued at $1000 each. There are 500,000 bonds on issue.

 Ordinary Shares:

 

These shares currently trade for $20.

The Beta of these shares is 1.25, the market risk premium is 10% and the risk-free rate is 5%. These shares last paid a dividend of 70 cents with expected growth of 5%.

There are 100 million shares on issue.

Other Information:

 

The tax rate is 15%. Calculate the following: (2 points for each question )

a)    Determine the EAR of the YTM for the debt that matures in 5 years.

b)    Determine the required return of the preference equity.
 

c)     Determine the required return of the ordinary equity using the CAPM.
 

d)    Determine the required return of the ordinary equity using the dividend discount model (DDM)

Answer rating: 100% (QA)

a To determine the Effective Annual Rate EAR of the YieldtoMaturity YTM for the debt that matures in 5 years we can use the following formula EAR 1 YT... View the full answer