Big Machinary Ltd. currently has the following capital structure: Ordinary shares: 25,000 outstanding ordinary shares. The firm just paid a $5.50 dividend per share in the current financial year. The firm is maintaining 2.5% annual growth rate in dividend indefinitely. Preferred shares: 20 000 outstanding preferred shares with face value of $100, paying fixed dividend rate of 15%. Debt: $1,500,000 par value of uncallable bond that pays annually 10% coupon rate with an annual before-tax yield to maturity of 8%. The bond issue has face value of $1,000 and will mature in 5 years. Company tax rate is 30%.

Required: Complete the following tasks:

a) Calculate the current price of the ordinary share if the average return of the shares in the same industry is 7%? (2 marks) ANSWER:

b) Calculate the current value of the preferred share if the average return of the shares in the same industry is 14% (2 marks) ANSWER:

c) Calculate the current price of the corporate bond? (2 marks) ANSWER:

d) Calculate the current market value (rounded off to the nearest whole number) and capital structure of the firm (rounded off to two decimal places) (2 marks) ANSWER:

e) Compute the weighted average cost of capital (WACC) under the traditional tax system for the firm, using dividend constant growth model for calculation the cost of ordinary equity (3 marks) ANSWER: