Canada Cranes is looking to determine its cost of capital and has asked you to assist.

Information available includes the following:

Preference Shares:

• The preference shares were issued for $40 with a 3% dividend. The current market price is $50.
• There are 5 million shares on issue

Debt:

• The debt that the firm has issued was issued 10 years ago and has 10 years left to maturity. The bonds pay quarterly coupon of 15% pa. The bonds were issued for $1000 each and are currently valued at $1000 each.
• There are 120,000 bonds on issue

Ordinary Shares:

• These shares currently trade for $4.
• The Beta of these shares is 2, the market risk premium is 3% and the risk-free rate is 4%.
• These shares last paid a dividend of 60 cents with expected growth of 4%.
• There are 100 million shares on issue

Other Information:

• Canada Cranes tax rate is 35%.

Calculate the following:

A) Determine the EAR of the YTM for the debt that matures in 10 years. (2 Marks) Please answer as a decimal to 4 decimal places.

Answer: Answer =

B) Determine the required return on the preference equity. (2 Marks) Please answer as a decimal to 4 decimal places.

Answer: Answer =

C) Determine the required return of the ordinary equity using the CAPM. (2 Marks) Please answer as a decimal to 4 decimal places.

Answer: Answer =

D) Determine the required return of the ordinary equity using the dividend discount model (DDM). (2 Marks) Please answer as a decimal to 4 decimal places.

Answer: Answer =

E) Determine the weight of debt, ordinary equity and preference equity to be used in the calculation of the after tax WACC. (3 Marks) Please answer as a decimal to 4 decimal places.

Answers: =

Weight Debt Answer =

Weight Ordinary Answer =

Weight Preference Answer =