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Question - a) Finance Manager Company Y states like this: "Although the project does not have the same risk as the firm, its relevant cost of capital should be equal to the firm's WACC because the firm's shareholders and debtholders are paid with cash from the firm's cash flows, not from the project's cash flow." State if this statement is TRUE or FALSE and why?
b) Explain how to calculate the cost of equity for common and preferred shares.
c) Company A currently has €300 million of market value debt outstanding. The 9 per cent coupon bonds (semi-annual pay) have a maturity of 15 years and are currently priced at €1.440,03 per bond. The firm 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. The firm also has 14 million ordinary shares outstanding with a price of €20.00. Company A is expected to pay a €2.20 ordinary share dividend one year from today, and that dividend is expected to increase by 5 per cent per year forever. If Company A is subject to a 40 per cent marginal tax rate, what is the firm's weighted average cost of capital?
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