Reference no: EM132472158

Problem - Biomedics Ltd is an Australian publicly listed firm on the Australian Stock Exchange. All shareholders are Australian residents for tax purposes. The firm wishes to expand into a sleep apnoea device that is much less intrusive to its wearers than those currently on the market and is looking at alternative financing sources and the firm's capital structure. The following relevant data has been identified.

1. It has a long term capital structure of 50% ordinary equity, 10% preference shares and 40% debt.

2. The target capital raising is $100,000,000.

3. To raise capital the Biomedics broker advises that they can sell new 10 year corporate bonds to investors for $1,070 with an annual coupon of 5% and a face value of $1,000. Issues costs are expected to be 1% of the face value.

4. Preference shares will be issued at $150 per share and pay a dividend of $11.25. They will have an issue cost of 3%.

5. Ordinary shares will be issued at a cost of 2% and are currently trading at $6.75 per share. They will pay a dividend of $0.58 this year and dividends are expected to grow by a constant rate of 4%.

6. The company pays tax on profits at a rate of 30%.

Required -

Question 1 - a. Calculate the value of debt Biomedics will need to issue to maintain their target capital structure.

b. What will be appropriate cost of debt for Biomedics?

Question 2 - a. Calculate the value of the preference shares Biomedics will need to issue to maintain their target capital structure.

b. What will be the appropriate cost of preference shares for Biomedics?

Question 3 - a. Calculate the value of ordinary shares Biomedics will need to issue to maintain their target capital structure.

b. What will be the appropriate cost of ordinary shares for Biomedics?

Question 4 - Calculate the Weighted Average Cost of Capital (WACC) for Biomedics following the new capital raising.

Question 5 - Biomedics has a current EBIT of $2milliion pa. The CFO approached the Board and advised them that the finance department has devised a strategy which will lower the company's cost of capital by 0.75%. How will this change the value of the company? Support your answer using theory and calculations.