Reference no: EM132575069
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.
b) Calculate the current price of the IGA ordinary share if the average return of the shares in the same industry is 10%.
c) Calculate the current total market value and capital structure of the firm.
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.
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.
Give a proper explanation with the formulas.