Ace-It Financial Calculators Ltd. has the following capital structure: Bonds ................ $40,000,000 at face (par) value Preferred

Question:

Ace-It Financial Calculators Ltd. has the following capital structure:

Bonds ................ $40,000,000 at face (par) value

Preferred ............... 5,000,000

Common stock ........... 15,000,000

Retained earnings .......... 25,000,000

$85,000,000

The bonds have a rating of BB and a coupon rate of 8% per annum with semi-annual payments. They have 11 years to maturity and a $1,000 face (par) value each. Any new issue of bonds would be purchased by the underwriter at $970 each for a flotation cost of $30. Present yield to maturity for similar BB rated “junk bonds” is 12%. Ace-its tax rate is 35 per cent. The preferred, of which there are 900,000 outstanding, are current trading at $9.00.

The annual dividend is $0.60. Flotation expenses on a new issue of preferred would be 5%.

There currently are 2.0 million common shares outstanding with an expected yield of 15%. Ace-its board is expected to declare an annual dividend on the common shares of $1.08 in the next year with those dividend payments expected to grow at 6.0% per year for the foreseeable future. At the current time, the company’s cash flow from operations is more than adequate for any capital projects.

A) Calculate the company’s WACC based on market values.

B) Calculate Kj using the CAPM (Capital Asset Pricing Model) based on the following assumptions: Government guaranteed T-Bills are currently yielding 3%, while the market rate of return is 8%. Ace-it Financial has a beta of 1.2.

Coupon
A coupon or coupon payment is the annual interest rate paid on a bond, expressed as a percentage of the face value and paid from issue date until maturity. Coupons are usually referred to in terms of the coupon rate (the sum of coupons paid in a... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...