9-1

The current share price of the Sunflower Ltd. is $20.

The company is expected to pay a $1 dividend per share next year.

After that, dividends are expected to grow by 4% per year.

The Sunflower Ltd. also has preferred shares outstanding that pay a $2 fixed dividend and are currently priced at $28.

The company has 5 million ordinary shares and 1 million preferred shares outstanding.

The Sunflower Ltd. has 18,836 of 7-year bonds outstanding.

The going market rate for such bonds is 8%.

The coupon payments are semi-annual at 9.17%.

The firm is subject to a 30% corporate tax rate.

The total book value of the companys equity is $50 million and $20 million for liabilities.

In answering the questions that follow, you will need to show all workings and intermediate calculations along with the final answer.

a. Determine the companys pre-tax cost of debt.

b. Estimate the WACC for the Sunflower Ltd.

9-2

The Media City Corporation is funded exclusively with common and preferred stock.

The current share price of the companys common share is $10.55 and the firms management has just made an announcement that Vivid is expected to pay a $0.75 dividend per share next year.

After that, dividends are expected to grow by 3.35% per year.

The firms preferred shares pay a $1.25 fixed dividend and are currently priced at $16.45.

The company has 1,350,000 ordinary shares and 485,000 preferred shares outstanding.

In answering the questions that follow, you will need to show all workings and intermediate calculations along with the final answer.

a. Calculate the companys cost of common equity.

b. Compute the companys cost of preferred equity.

c. Estimate the firms total market value of equity.

d. Determine the percentage of its assets that the Media City Corporation finances through the issue of

(i) common shares, and (ii) preferred shares.

e. The managers of Media City Corporation have decided they would like to raise more capital to finance the purchase of a new factory in Manama, Bahrain through the issue of shares.

Write a brief note to the companys CFO, Mr Stephen Baldwin, where you explain and provide reasoning for choosing either preferred or ordinary stock.