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What is the expected rate of return for neaptide

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Reference no: EM132415624

Problem:

Recall that Ke = Kj. with an efficient market. Neaptide Ships Ltd. Financial statements report the following capital structure: 

It's somewhat risky shares have a beta of 1.70 in a market that expects the market portfolio to return 7.5% in the next year. Treasury bills currently yield 2%. 

A) What is the expected rate of return for Neaptide's common shares?

Bonds $100,000,000 Preferreds 25,000,000 Common stock 25,000,000 Retained earnings 60,000,000 $216,250,000 

The bonds have an annual coupon payable at the rate of 7% and mature in 12 years. A new issue of bonds suggests a current market yield of 5%. Any new issue of bonds will be purchased by the underwriter at $980 each. 

The preferreds of which there are 1,250,000 outstanding currently trade at $25. The dividend is currently set at $1.10. Flotation expenses on a new issue will be 4%. 

There are currently 10 million common shares outstanding. The shares will pay an annual dividend of $0.70 over the next year and the dividend growth rate for Neaptide is estimated to be 5.0% for the foreseeable future. Shares are priced efficiently based on the CAPM. Any new issue of common shares will require flotation expenses of 6%. 

At the current time Neaptide's cash flow from its operations not sufficient for any capital projects. Neaptide's tax rate is 28 percent. 

B) Calculate the Neaptide's WACC based on market values.

Reference no: EM132415624

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