Reference no: EM132541049

The beta for Microsoft Inc. ordinary shares is 1.25. Microsoft is based in the USA. Suppose the yield on 10 year' government bonds in that country is 3% and you expect listed shares in the USA to consistently make a return of 10% including dividends. Today the price of Microsoft's ordinary shares is $200 and there are 21.7 million issued ordinary shares. You expect dividends on ordinary shares to increase at a constant rate of 2.5% per annum nominal and just last week you saw that Microsoft paid a dividend of $4.00 per share. The company pays a dividend once a year only.

You know that Microsoft has also issued 900,000 preference shares that are currently trading at $150 and which pay a fixed dividend of $6.00 annually.

You are also aware that Microsoft has 1.65 Million bonds outstanding and that these are 3 years from maturity and pay coupon interest of 4% on a Face Value of $1000. The yield to maturity on these securities is 5.00%. Coupon is paid annually.

Microsoft's preferred approach in working out its cost of ordinary equity is the Capital Asset Pricing Model (CAPM). The corporate tax rate is 25%.

Required: Compute Weighted Average Cost of Capital (WACC) for Microsoft and show all workings. You are to respect that company's preference for the CAPM.