Reference no: EM133008611

Question - Canada Cranes is looking to determine its cost of capital and has asked you to assist.

Information available includes the following:

Preference Shares: The preference shares were issued for $18 with a $1.50 dividend. The current market price is $16.

Debt: The debt that the firm has issued was issued 18 years ago and has 5 years left to maturity. The bonds pay a monthly coupon of 6% pa. The bonds were issued for $1000 each and are currently valued at $1000 each.

Ordinary Shares: These shares currently trade for $11. The Beta of these shares is 1.4, the return on the market is 12% and the risk free rate is 4%. These shares last paid a dividend of 50 cents with expected growth of 3%.

Other Information: Canada Cranes' tax rate is 25%.

Required - Calculate the following:

A) Determine the EAR of the YTM for the debt that matures in 5 years.

B) Determine the required return on the preference equity.

C) Determine the required return of the ordinary equity using the CAPM.

D) Determine the required return of the ordinary equity using the dividend discount model (DDM).

E) The Debt-to-Equity ratio of the company is 0.8. In terms of equity, 60% is ordinary equity. Determine the weight of debt, ordinary equity and preference equity to be used in the calculation of the after tax WACC.