140 200 ASSETS Cash Accounts Receivable Inventory Property, plant & equipment 1,200 Total Assets 2,150 610 2 LIABILITIES Notes Accounts payable 120 Bank loan interest only) 1 240 Mortgage Loan 530 Corporate bonds 3 300 Total liabilities 1,190 SHAREHOLDERS' EQUITY Ordinary shares 430 Preference Shares 250 Retained earnings 280 Total shareholders' equity 960 Total liabilities and shareholders' equity 2,150 4 1. The interest rate on the bank loan is 8.2% p.a. 2. The interest rate on the mortgage loan is 5.9% p.a. 3. The corporate bonds have a credit rating of AA and have 2 years to maturity. They make quarterly coupon payments at a coupon rate of 7% p.a. 4. The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 1.2. They have just paid a dividend of $0.07. The dividend is expected to grow at a rate of 7% p.a. for the next 3 years, and after that, it will grow at a constant rate of 3% p.a. in perpetuity. 5. The preference shares have a par value of $1 each and are shown on the Balance Sheet at their par value. They pay a constant dividend of $0.10, and they are currently trading for $1.2. 6. The risk premium for ordinary shares is 8%. 7. The corporate tax rate is 30%. The 2-year risk-free rate is O03%. The 10-year risk- free rate is 1.14%. 8 YE Rating AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ ccc CCC- CC 1 yr 128 139 150 161 172 183 194 205 216 227 238 249 260 271 282 293 304 315 326 337 348 2 yr 168 179 190 201 212 223 234 245 256 267 278 289 3 yr 208 219 230 241 252 263 274 285 296 307 318 329 4 yr 248 259 270 281 292 303 314 325 336 347 358 369 380 391 402 413 424 435 446 457 468 Syr 288 299 310 321 332 343 354 365 376 387 398 409 420 431 442 453 464 475 486 497 508 6 yr 328 339 350 361 372 383 394 405 416 427 438 449 460 471 7 yr 368 379 390 401 412 423 434 445 456 467 478 489 500 511 522 S33 544 SSS 566 577 588 408 419 430 441 452 463 474 485 496 507 518 529 540 551 562 573 584 595 606 617 628 9 yr 448 459 470 481 492 503 514 525 536 547 558 569 580 591 602 613 624 635 646 657 668 10 yr 488 499 510 521 532 543 S54 565 576 587 598 609 620 631 642 653 664 675 686 697 708 300 340 482 311 322 333 344 355 366 377 388 351 362 373 384 395 406 417 428 493 504 515 526 537 548 Calculate the before-tax cost of bank loans, mortgage loans, and corporate bonds 140 200 ASSETS Cash Accounts Receivable Inventory Property, plant & equipment 1,200 Total Assets 2,150 610 2 LIABILITIES Notes Accounts payable 120 Bank loan interest only) 1 240 Mortgage Loan 530 Corporate bonds 3 300 Total liabilities 1,190 SHAREHOLDERS' EQUITY Ordinary shares 430 Preference Shares 250 Retained earnings 280 Total shareholders' equity 960 Total liabilities and shareholders' equity 2,150 4 1. The interest rate on the bank loan is 8.2% p.a. 2. The interest rate on the mortgage loan is 5.9% p.a. 3. The corporate bonds have a credit rating of AA and have 2 years to maturity. They make quarterly coupon payments at a coupon rate of 7% p.a. 4. The ordinary shares are shown on the balance sheet at their book value of $1 per share. They have a beta of 1.2. They have just paid a dividend of $0.07. The dividend is expected to grow at a rate of 7% p.a. for the next 3 years, and after that, it will grow at a constant rate of 3% p.a. in perpetuity. 5. The preference shares have a par value of $1 each and are shown on the Balance Sheet at their par value. They pay a constant dividend of $0.10, and they are currently trading for $1.2. 6. The risk premium for ordinary shares is 8%. 7. The corporate tax rate is 30%. The 2-year risk-free rate is O03%. The 10-year risk- free rate is 1.14%. 8 YE Rating AAA AA+ AA AA- A+ A A- BBB+ BBB BBB- BB+ BB BB- B+ B B- CCC+ ccc CCC- CC 1 yr 128 139 150 161 172 183 194 205 216 227 238 249 260 271 282 293 304 315 326 337 348 2 yr 168 179 190 201 212 223 234 245 256 267 278 289 3 yr 208 219 230 241 252 263 274 285 296 307 318 329 4 yr 248 259 270 281 292 303 314 325 336 347 358 369 380 391 402 413 424 435 446 457 468 Syr 288 299 310 321 332 343 354 365 376 387 398 409 420 431 442 453 464 475 486 497 508 6 yr 328 339 350 361 372 383 394 405 416 427 438 449 460 471 7 yr 368 379 390 401 412 423 434 445 456 467 478 489 500 511 522 S33 544 SSS 566 577 588 408 419 430 441 452 463 474 485 496 507 518 529 540 551 562 573 584 595 606 617 628 9 yr 448 459 470 481 492 503 514 525 536 547 558 569 580 591 602 613 624 635 646 657 668 10 yr 488 499 510 521 532 543 S54 565 576 587 598 609 620 631 642 653 664 675 686 697 708 300 340 482 311 322 333 344 355 366 377 388 351 362 373 384 395 406 417 428 493 504 515 526 537 548 Calculate the before-tax cost of bank loans, mortgage loans, and corporate bonds