Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

B. i. The firm has a beta of 1.2. Market return equals 14% and a risk-free rate of return is 6%. Determine IPL's cost of

image text in transcribed

image text in transcribed

B. i. The firm has a beta of 1.2. Market return equals 14% and a risk-free rate of return is 6%. Determine IPL's cost of common equity. (3 marks) ii. If the company's 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) (Total 20 marks) SECTION A Instruction: Complete ALL questions from this section. 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 IPL's 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 organisation's WACC if the target capital structure comprises 40% debt, 10% preferred stock and 50% common stock

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Auditing Assurance And Risk

Authors: W Robert Knechel, Steven E Salterio

4th Edition

1315531720, 9781315531724

More Books

Students also viewed these Accounting questions

Question

identify the main types of research studies in HRM research;

Answered: 1 week ago

Question

decide what data to gather and when;

Answered: 1 week ago