Reference no: EM132793996

Sweet Jinks Limited

Extracts - Balance Sheet as at 30th November 2020

1,000,000 Issued Ordinary Shares 4,000,000

5% Preference Shares @5 each 1,500,000

5% Bonds - Redeemable at par 30/11/2026 1,500,000

1. Ordinary shares are currently trading at $6.50.
2. Preference shares have a market value of $2.90.
3. Sweet Jinks' main competitors, Island Gulp and Quench Quick have equity betas of 1.48 and 1.72 respectively.
4. The interest rate on 3-month T-bills is 4% and the expected return on the market index is 10.5%.
5. The bonds are presently trading at 97.
6. Flotation costs on the new issuances of debt are 3%.
7. Bond interest is paid semi-annually.
8. Preference dividends are paid semi-annually.
9. Corporate tax rate is 40%

Required:

Problem a) Calculate Sweet Jinks' after-tax cost of debt.

Problem b) Calculate Sweet Jinks' cost of equity.

Problem c) Calculate Sweet Jinks' cost of preferred shares.

Problem d) Calculate Sweet Jinks' Weighted Average Cost of Capital

Problem e) Based on its capital structure, would you categorize this firm as being highly financially leveraged? What are the pros and cons of financial leverage.

Problem f) Explain why using a firm's WACC is not always appropriate for the evaluation of a new project.