Reference no: EM132544441

Sanstreet, Inc. is looking to determine its cost of capital and has asked you to assist.

Information available include the following:

Preference Shares: no total market value

The preference shares were issued for $11 with a 10% dividend. The current market price is $17.

Debt:

It has bonds on issue with a face value of $1000 that currently pay an annual coupon of 8%. These bonds currently trade at par.

Ordinary Shares:

1. The company also has 100 million ordinary shares on issue with a market price of $2 each.
2. Current risk-free rate is 4%, market risk premium is 8% and the company has a beta coefficient of 1.2.
3. The company is expected to pay a dividend of 10 cents next year with expected growth of 3%.

Other Information:

1. The tax rate is 30%.
2. The debt to equity ratio is 0.8, while of the equity the percentage breakdown of market values is 35% preference shares and 65% ordinary shares.

Calculate the following:

Question A) Determine the after-tax cost of debt.

Question B) Determine the required return on the preference shares.

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

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

Question E) Determine the weight of debt, ordinary equity, and preference equity to be used in the calculation of the after tax WACC.