IGA Ltd. currently has the following capital structure: Debt: $1,500,000 par value of outstanding bond that pays annually 9% coupon rate with an annual before-tax yield to maturity of 8%. The bond issue has face value of $1,000 and will mature in 10 years. Ordinary shares: $2,500,000 book value of outstanding ordinary shares. Nominal value of each share is $100. The firm plan to pay a $5.50 dividend per share next year. The firm is maintaining 4% annual growth rate in dividends, which is expected to continue indefinitely. The current year net profit is $270,000. The firm's marginal tax rate is 30%. Required: a) Calculate the current price of the IGA corporate bond. ANSWER: b) Calculate the current price of the IGA ordinary share if the average return of the shares in the same industry is 10%. ANSWER: c) Calculate the current total market value and capital structure of the firm. ANSWER: d) Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm, using dividend constant growth model for calculation the cost of ordinary equity. ANSWER: e) IGA Ltd. is planning a new project that require buying a $250,000 equipment. With the current capital structure, identify the dividend payout ratio of the company in accordance with residual theory.
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