Question
As the CFO of Moonlimited, you are calculating the cost of capital for Moonlimiteds projects. Moonlimited has 4,000 bonds outstanding that mature in 20 years
As the CFO of Moonlimited, you are calculating the cost of capital for Moonlimiteds projects.
Moonlimited has 4,000 bonds outstanding that mature in 20 years with a face value of $1,000 each. Each bond is traded at $1,250, with the effective pre-tax cost of debt of 9.5%.
Moonlimited has 120,000 preferred shares outstanding. Each preferred share pays a $3.4 dividend and can be sold for $25. The firms tax rate is 25%.
Moonlimited is considering a project that requires an initial investment of $3 million. You estimate that the projects free cash flows will be $0.32 million per year in perpetuity. You consider the after-tax weighted average cost of capital as the proper discount rate to evaluate this project.
(a) What are the capital structure weights based on market values? Explain. (2 marks)
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