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A firm has issued $5 million bonds that pay a 6.5% annual coupon and the yield to maturity is 6%. The market price of the bonds is $5.5 million. There are 2 million preference shares outstanding, which have a book value of $1.5 per share and which are trading for $1.80$ per share. The preference shares pay an annual dividend of $0.27 per share.
There are 8 million ordinary shares outstanding, which have a book value of $0.95 per share and which are currently priced at $0.80 per share. The firm's ordinary shares have a beta of 1.25. The yield on long-term government bonds is 3.5% p.a. The long-term market risk premium is 9% p.a. The corporate tax rate is 40%.
Problem a) What is the market value of preference shares?
Problem b) What is the cost of preference shares? Problem c) What is the market value of ordinary shares? Problem d) What is the cost of ordinary shares? Problem e) What is the firm's weighted average cost of capital (WACC)?
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