ANSWER SECTION B ONLY

As an investment manager at H & L Securities, you are preparing for the next meeting of the investment committee which has requested you to assess the capital structure of Industrial Production Limited (IPL), a manufacturer of industrial products. The following information is available to assist your assessment:

A. i. Preferred Stock: Industrial Production Limited issued a 10% preferred share which sold for $100 per share par value. The cost of issuing and selling the stock was $2 per share. Calculate the cost of this preferred share. (2 marks) ii. Common Stock: The company has a common share with a market price of $25 per share and an expected dividend of $2 per share at the coming year end. Growth rate in dividends has been 5%. Calculate the cost of IPLs common equity. (2 marks) iii. Debt Determine the after-tax cost of debt. Industrial Production Limited can borrow funds at an interest rate of 11% per year. Assume that the tax rate is 35%. (2 marks) iv. Use the information above to determine the organisations WACC if the target capital structure comprises 40% debt, 10% preferred stock and 50% common stock. (3 marks)

B. i. The firm has a beta of 1.2. Market return equals 14% and a risk-free rate of return is 6%. Determine IPLs cost of common equity. (3 marks)

ii. If the companys capital structure is modified to 30% debt, 25% preferred stock and 45% common stock, what is its new WACC? (3 marks)

iii. Industrial Production Limited is expected to pay a year-end dividend of $2.50 per share and its flotation cost is 5%. Investors have projected a growth rate of 12% per annum. What is the cost of retained earnings, using the discounted cash flow approach? (2 marks)

iv. Calculate the cost of issuing new common stock. (3 marks)