Question
A mining company plans to raise new capital for a natural gas exploration project in the Northern Territory of Australia. In order to assess the
A mining company plans to raise new capital for a natural gas exploration project in the Northern Territory of Australia. In order to assess the profitability of the proposed expansion the company's CFO has asked you to calculate the weighted average cost of capital (WACC) for the company.
The company's ordinary shares are trading at $32 with an expected dividend (D1) of $2.50 per share. The expected growth rate into the foreseeable future for earnings and dividends per share is 3% per annum. The firm's preference share stock is trading at $43 per share and carries a dividend of $2.00 per share. The company currently has an outstanding $1,000 bond issue with a 4% coupon rate that is currently trading on the market with 15 years until maturity for $930. The firm has been informed by an investment banker that it will be able to issue bonds of equal risk and credit rating.
The capital structure of the firm is comprised of 55% debts, 105 % preference shares and 35% common shares. The corporate tax rate is 30% and all of its dividends are fully franked and all of its shareholders are Australian citizens for tax purposes.
a. Calculate the firm's cost of ordinary equity (5 marks).
b. Calculate the firm's cost of preference shares (5 marks).
c. Calculate the firm's cost of debt (5 marks).
d. Calculate the firm's weighted average cost of capital (WACC) (5 marks).
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