Reference no: EM132957928

You have just got a job as a financial advisor for AOE Industries Ltd, an electrical equipment company. On your first day of work, your boss provides you with the following details regarding the capital structure of the company as in the book-value balance sheet:

Liabilities

Short-term loans payable (interest rate 7% per annum compounded quarterly) =$32million
3000 corporate bonds (the face value of each is $100,000)=$300 million

Shareholders' equity

Common stock (10 million shares, issued at $42 each)=$420 million
Preferred stock (1 million 7% shares, issued at $48 each)=$48 million

• These corporate bonds pay semi-annual coupons at a rate of 14% per annum and will mature exactly in 20 years from today. The current yield to maturity on these bonds is 17% per annum.
• The current price of a common share is $47. The company is expected to pay a dividend of $2.5 per share next year and maintain the same annual dividend payment of $2.5 per share in perpetuity.
• The market price of a preference share is $54.
• The company tax rate is 35%.

Problem (a) Calculate the after-tax weighted average cost of debt for AOE Industries Ltd.

Problem (b) Calculate the weighted average cost of equity for AOE Industries Ltd.

Problem (c) Calculate the weighted average cost of capital for AOE Industries Ltd.