Question

e Georgian Bay Ice Company Ltd (Georgian) is looking to determine its cost of capital and has asked you to assist.

Information available includes the following:

Preference Shares:

• The preference shares were issued for $12 with a 10% dividend. The current market price is $16. When they were initially issued, they issued $48m worth of shares.

Debt:

• The debt that the firm has issued was issued 10 years ago and has 5 years left to maturity. The bonds pay an annual coupon of 6%. The bonds were issued for $1000 each and are currently valued at $1000 each.

Ordinary Shares:

• The company also has 100 million ordinary shares on issue with a market price of $2 each.
• The Beta of these shares is 1.5, the expected return on the market is 8% and the risk free rate is 4%.
• These shares last paid a dividend of 10 cents with expected growth of 3%.

Other Information:

• Georgian’s tax rate is 30%.
• The Debt to Equity Ratio of Georgian is 0.8.

Calculate the following:

A)   Determine the YTM for the debt that matures in 5 years. Please answer as a decimal to 4 decimal places.

Answer

B)   Determine the required return on the preference equity. Please answer as a decimal to 4 decimal places.

Answer

C)   Determine the required return of the ordinary equity using the CAPM. Please answer as a decimal to 4 decimal places.

Answer

D)   Determine the required return of the ordinary equity using the dividend discount model (DDM). Please answer as a decimal to 4 decimal places.

Answer

Answer 1

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