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ASSigning Question 2 (25 marks) Kowloon Broadband Company Limited has the following equity and debt structure: Equity: 1,500,000 ordinary shares outstanding with current share price
ASSigning Question 2 (25 marks) Kowloon Broadband Company Limited has the following equity and debt structure: Equity: 1,500,000 ordinary shares outstanding with current share price $80 and beta 0.91. Debt: 150,000 bonds outstanding with $1,000 par value, 6% coupon (semiannual payment) maturing in 20 years, selling for 105% of par and yield to maturity (YTM) is calculated as 5.58%. Further assume that the risk-free rate is 3%, expected market return is 10% and the company has a standard tax rate of 16.5%. a. Calculate the cost of equity. (5 marks) b. Calculate the after tax cost of debt. (5 marks) c. What is the company's weighted average cost of capital (WACC)? (6 marks) d. What are the advantages of using the security market line (SML) approach to finding the cost of equity? What are the disadvantages? (4 marks) e. If the company has two divisions with different risk profiles (one with high risk and the other with low risk), would it be appropriate to use a single WACC to evaluate projects in different divisions? Explain
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