The following information relates to MNO Ltd.
(a) What is the MNO’s after-tax cost of debt?
(b) What is MNO’s cost of ordinary shares?
(c) What are the price and market value of MNO’s ordinary shares?
a) Since,Given Yield = Coupon rate = 5%
Price of the bond will be equal to its face value= 100
Therefore after tax cost of debt is given by= 5%*(1-tax rate)
b) cost of ordinary shares is given by= Rf+ (Rm-Rf)*beta
where Rf is the risk free rate
Rm is the market rate of return
Rm-Rf= Market risk premium
Given Rf= 5%
Hence Cost of ordinary = 5%+10%*1.3= 18%
c) For a company paying constant dividend every year Price of the shares is given by= Dividend expected to pay in next year/(cost of ordinary shares - Growth rate)
There Market value of shares = 2million shares *36.67= 73.33 Million
(Note if it is assumed that 5.5 is the Next year dividend. If it is assumed that 5.5 is the current year dividend then Solution will be = 5.5(1+3%)/(18%-3%)= 37.77)
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