What is the after-tax cost of preference shares

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Reference no: EM133065091

Critical Thinking Questions

Question 1: Your manager just finished calculating your company's weighted average cost of capital. He is relieved because he says that he can now use that cost of capital to evaluate all projects that the company is considering for the next 4 years. Evaluate that statement.

Question 2: Cost of ordinary shares: Fast Way Ltd is expected to pay a dividend of $1.10 one year from today on its ordinary shares. That dividend is expected to increase by 5 per cent every year thereafter. If the price of Fast Way Ltd shares is $13.75, what is Fast Way Ltd's cost of ordinary equity?

Question 3: Cost of preference shares: Fjord Luxury Liners has preference shares outstanding that pay an annual dividend equal to $15 per year. If the current price of Fjord Luxury Liners preference shares is $107.14, what is the after-tax cost of preference shares for Fjord Luxury Liners?

Question 4: WACC for a company: Capital Ltd has a capital structure that is financed, based on current market values, with 50 per cent debt, 10 per cent preference shares and 40 per cent ordinary shares. If the return offered to the investors for each of those sources is 8 per cent, 10 per cent, and 15 per cent for debt, preference shares and ordinary shares, respectively, then what is Capital Ltd's after-tax WACC? Assume that the company's corporate tax rate is 30 per cent.

Question 5: Current cost of a bond: You know that the after-tax cost of debt capital for Bubbles Champagne is 7 per cent. If the company has only one issue of 5-year maturity bonds outstanding, what is the current price of the bonds if the coupon rate on those bonds is 10 per cent? Assume the bonds make semiannual coupon payments and the corporate tax rate is 30 per cent.

WACC for a company: A company financed totally with ordinary equity is evaluating two distinct projects. The first project has a large amount of non- systematic risk and a small amount of systematic risk. The second project has a small amount of non-systematic risk and a large amount of systematic risk. Which project, if taken, will have a tendency to increase the company's cost of capital?.

WACC for a company: Imaginary Products Ltd currently has $300 million of market value debt outstanding. The 9 per cent coupon bonds (semiannual pay) have a maturity of 15 years and are currently priced at $1,440.03 per bond. Thecompany also has an issue of 2 million preference shares outstanding with a market price of $12.00. The preference shares offer an annual dividend of $1.20. Imaginary also has 14 million ordinary shares outstanding with a price of $20.00 per share. The company is expected to pay a $2.20 ordinary dividend one year from today, and that dividend is expected to increase by 5 per cent per year forever. If the corporate tax rate is 30 per cent, then what is the company's weighted average cost of capital?

CHALLENGING

Question 6: You know that the return of Momentum Cyclicals' ordinary shares reacts to macroeconomic information 1.6 more times than the return of the market. If the risk-free rate of return is 4 per cent and the market risk premium is 6 per cent, what is Momentum Cyclicals' cost of ordinary equity capital?

Question 7: The cost of equity is equal to the
a. expected market return.
b. rate of return required byshareholders.
c. cost of retained earnings plus dividends.
d. risk the company incurs whenfinancing.

Reference no: EM133065091

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