Question
As an investment manager at H & L Securities, you are preparing for the next meeting of the investment committee which has requested you to
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.
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