3,000,000 Clients Investments: (40 marks) 1. Douwe Ltd. is a logistics company with the following balance sheet: Lorem dinhe Bonds: Par S100, annual coupon 75 pa, 3 years to maturity Equity Preference shares Ordinary shares Total 1,000,000 6,000,000 10,000,000 Notes The company's bank has advised that the interest rate on any new debt finance provided for the projects would be 8.55 pa if the debt issue is of similar risk and of the same time to maturity and coupon rate. There are currently 500,000 preference shares on issue, which pay a dividend of SO.17 per year. The preference shares currently sell for $250. The company's existing 6,000,000 ordinary shares currently sell for $0.99 each and management has disclosed that it expects to pay a dividend of 5 cents per share at the end of the next year. Historically, dividends have increased at an annual rate of 7% p.a. and are expected to continue to do so in the future. The company's tax rate is 30%. Your client wishes to understand, with the use of workings, the following aspects of this company and states that their required rate of return for the investment in a company with similar characteristics to Douwe would be 125 pa. Advise the client on whether you believe this to be a good or bad investment and the rationale for investment (or not investing) a) What are the assumptions underlying the use of a dividend growth model for the estimation of a company's cost of equity? b) Determine the market value proportions of debt, preference shares and ordinary equity comprising the company's capital structure c) Calculate the after-tax costs of capital for each source of finance. d) Determine the after-tax weighted average cost of capital for the company. 41 Page c) Under what conditions can the firm's weighted average cost of capital be used for assessing new projects? 1) Provide recommendation to your client Tp Dy S 3.000.000 Clients Investments: (40 marks) 1. Douwe Ltd. is a logistics company with the following balance sheet: Long-term debi Bonds: Par S100, annual coupon 7% p.a., 3 years to maturity Equity Preference shares Ordinary shares Total 1,000,000 6,000,000 10,000,000 Notes: The company's bank has advised that the interest rate on any new debt finance provided for the projects would be 8.5% p.a. if the debt issue similar risk and of the same time to maturity and coupon rate. There are currently 500,000 preference shares on issue, which pay a dividend of $0.17 per year. The preference shares currently sell for $2.50. The company's existing 6,000,000 ordinary shares currently sell for $0.95 each and management has disclosed that it expects to pay a dividend of 5 cents per share at the end of the next year. Historically, dividends have increased at an annual rate of 7% p.a. and are expected to continue to do so in the future. The company state ounisa.edu.au management TSUISCIOSCI expects to pay a uvienu scents per share at the end of the next year. Historically, dividends have increased at an annual rate of 7% p.a. and are expected to continue to do so in the future. The company's tax rate is 30%. Your client wishes to understand, with the use of workings, the following aspects of this company and states that their required rate of return for the investment in a company with similar characteristics to Douwe would be 12% p.a. Advise the client on whether you believe this to be a good or bad investment and the rationale for investment (or not investing). a) What are the assumptions underlying the use of a dividend growth model for the estimation of a company's cost of equity? b) Determine the market value proportions of debt, preference shares and ordinary equity comprising the company's capital structure. c) Calculate the after-tax costs of capital for each source of finance. d) Determine the after-tax weighted average cost of capital for the company. 41 Page equity comprising the company's capital structure. c) Calculate the after-tax costs of capital for each source of finance. d) Determine the after-tax weighted average cost of capital for the company. 41 Page e) Under what conditions can the firm's weighted average cost of capital be used for assessing new projects? f) Provide recommendation to your client. (14 marl