a)Hitech Media Limited (HM) used local and international research to its advantage and created products which provided an exceptional competitive position for the firm.Industry competitors are expected to catch up with HM in three years. The company expects it will enjoy growth of 12% in the first year, 11% in the second year, and 9% in the third year, after which it will have a constant growth of 4% forever.The company last paid a dividend of $3.60 per share and expects that the dividends will grow at the same rate as its profits.The cost of capital is 8%.

Calculate HM's share price today (P₀).(7 Marks)

b)Brawn Investment Company is evaluating two capital structures for Sep Manufacturing Limited (SML).For one structure the investment company is recommending the use of new common equity and for the second structure the use of new preferred shares. The details for both structures are presented in the tables below. The tax rate is 35%.

SML 1

Debt component

30%

Before-tax cost of debt

10%

Equity Component

60%

Dividends to be paid at year end

$2.60

Growth rate

5%

Flotation Costs

5%

Price of stock

$80

Preferred Share Component

10%

Dividends of preferred share

6

Price of preferred shares

$80

i.)Use the information in the table above to calculate the WACC for SML 1. (8 Marks)

SML 2

Debt component

40%

Before-tax cost of debt

12%

Equity Component

50%

Dividends paid last year

$3.00

Growth rate

6%

Price of stock

$60

Preferred Share Component

10%

Dividends of preferred share

8

Price of preferred shares

$90

Flotation costs

4%

ii)Use the information in the table above to calculate the WACC for SML 2. (6 Marks)

iii)Based on your answers from parts (i) and (ii) select the capital structure with the lowest WACC. Given this, which of the following projects should SML select? Provide justification for your answer.(4 Marks)

Projects

Returns

ZAP

7%

MAP

10%

DAP

8%

CAP

9.9%