Question

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.

Answer #1

Cotton On Ltd. currently has the following capital structure:
Debt: $3,500,000 par value of outstanding bond that pays annually
10% coupon rate with an annual before-tax yield to maturity of 12%.
The bond issue has face value of $1,000 and will mature in 20
years. Ordinary shares: $5,500,000 book value of outstanding
ordinary shares. Nominal value of each share is $100. The firm plan
just paid a $8.50 dividend per share. The firm is maintaining 4%
annual growth rate in...

Marshal Ltd currently has $250 million of market value debt
outstanding. The 9 percent coupon bonds (semiannual pay) have a
maturity of 15 years and are currently priced at $877.07 per bond.
The company also has an issue of 2 million perpetual preference
shares outstanding with a market price of $27. The perpetual
preference shares offer an annual dividend of $1.20. Imaginary also
has 14 million shares of ordinary shares outstanding with a price
of $20.00 per share. The company...

B currently has a $400 million market value of debt outstanding.
This debt was contracted five years ago at the rate of 4%. B can
refinance 60% of the debt at 5% with the remaining 40% refinanced
at 6.5%. The company also has an issue of 2 million preference
shares outstanding with a market price of $20 per share. The
preference shares offer an annual dividend of $1.5 per share. B
also has 14 million ordinary shares outstanding with a...

(i) Boral currently has $400 million market value of debt
outstanding. This debt was contracted five years ago at the rate of
4%. Boral can refinance 60% of the debt at 5% with the remaining
40% refinanced at 6.5%. The company also has an issue of 2 million
preference shares outstanding with a market price of $20 per share.
The preference shares offer an annual dividend of $1.5 per share.
Boral also has 14 million ordinary shares outstanding with a...

Western Electric has 35,000 ordinary shares outstanding at a
price per share of $47 and a rate of return of 13.5%. The firm has
5,000 preference shares paying 7% dividend outstanding at a price
of $58 a share. The preferred share has a par value of $100. The
outstanding bond has a total face value of $450,000 and currently
sells for 102% of face. The pre-tax yield-to-maturity on the bond
is 8.49%. Required: a) Calculate the total market value of...

ABC's current book value capital structure is: Bonds $40 million
(Number of bonds outstanding= 40,000) (Coupon rate= 10% per annum)
(Coupon payments annual, the face value= $1,000) (Remaining
maturity= 16 years) Common Stock $50 million (Number of shares
outstanding= 2million) Retained earnings $10 million The current
yield to maturity of the firm's bonds is 7%. The current dividends
per share= $2.5 and the growth rate of the dividends stream is 4%
per annum and into indefinite future. The current required...

The Imaginary Products Co. currently has debt with a market
value of $275 million outstanding. The debt consists of 9 percent
coupon bonds (semiannual coupon payments) which have a maturity of
15 years and are currently priced at $1,392.42 per bond. The firm
also has an issue of 2 million preferred shares outstanding with a
market price of $11. The preferred shares pay an annual dividend of
$1.20. Imaginary also has 14 million shares of common stock
outstanding with a...

The following information relates to MNO Ltd.
MNO has 300,000 bonds outstanding with a Face Value of $100
each, 10 years to maturity and pay an annual coupon of 5%. The
yield on the bonds is 5% p.a. MNO’s marginal corporate tax rate is
30%.
MNO has 2 million ordinary shares on issue. The shares have a
Beta of 1.3, the market risk premium is 10% and the risk-free rate
is 5%. These shares are expected to pay a dividend...

Consider a company with the following capital structure: The
company’s 40,000 bonds are selling at 80% of $10,000 face value per
bond, while 80 million common shares are selling at $5.50 per share
and 160,000 preferred shares are selling at $250 per share. The
company’s bonds are priced to yield 6%. Using the single-factor
model, the company’s equity beta is estimated to be 1.6. And the
company’s preferred shares are committed to pay $20 annual dividend
per share indefinitely. The...

17. Given an optimal capital structure that is 40% debt,
calculate the weighted average cost of capital given the following
additional information: Assume that the company has no outstanding
preferred stock. (10 points) Bond coupon rate 10% Current
market price of the bond $1000 Expected dividend on common stock
$4 Common stock price $80 Constant growth rate for common stock
9% The firm expects to pay total flotation costs of $50,000 when
it issues...

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