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Question - The following information relates the KL Corporation Ltd.
KL has 80,000 bonds outstanding with a face value of $100 each, which have 5 years to maturity. The market value of these bonds is $11 million. KL's marginal corporate tax rate is 30%. M has given KL a debt rating of BBB. The following table shows the current risk premium based on the debt rating. The current yield on long-term Commonwealth Treasury bonds is 3%.
KL has 2.5 million preference shares on issue, which are currently trading for $2.40 each. They pay an annual dividend of 36 cents.
KL has 4 million ordinary shares on issue, which are currently trading for $12.80 each. The beta on these shares is 1.5. The market risk premium is 10%.
Required -
(a) What is KLs' after-tax cost of debt?
(b) What is KLs' cost of preference shares?
(c) What is KLs' cost of ordinary shares based on the CAPM?
(d) What is KLs' WACC?
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