Reference no: EM132911172

XYZ Electronic Ltd. is a company that produces electronics equipment for commercial and residential customers. XYZ Electronic Ltd. is a publicly listed company and it currently has 20 million ordinary shares on issue. The beta of its share is 1.2. Government bonds are currently trading at 3% per annum and the market risk premium is 7%.

Problem (a) XYZ Electronic Ltd. is forecasting to pay a dividend of $0.4 in the coming year and the dividend is expected to grow at a rate of 5% per annum. Calculate the cost of equity for ordinary shares and the value of ordinary shares.

Problem (b) XYZ Electronic Ltd. has 1 million preference shares outstanding with a current market price at $90 per share. The par value of the preference shares is $100. Preference shares pay a constant dividend of $5 per year. Calculate the cost of the equity for preference shares and the value of preference shares.

Problem (c) XYZ Electronic Ltd. bonds have 10 years bond with an annual coupon rate of 10% and a face value of $50,000. The bond was initially trading at par. Assume the coupons are paid twice a year and there are eight years remaining until the bonds mature. The current market yield on this bond is 9%. The firm has 6,000 bonds outstanding. Calculate the cost of debt and the debt value.

Problem (d) Calculate the WACC for this company, assuming the tax rate is 30%.

Problem (e) In part (c), you have evaluated the current bond price for XYZ Electronic Ltd. Is the bond currently trading at premium or discount? And what would you expect the bond price going to be in five years' time, assuming the YTM does not change.

Problem (f) You realized that the bond was traded at par when it was first issued. And the market yields have been changed since then. Discuss the impact of this change on the existing bondholders' return if they (1) want to sell the bond today? (2) wants to hold the bond till maturity?