Cloudstreet Ltd is an Australian firm which is publicly-listed on the ASX. The company has a long term target capital structure of 60% Ordinary Equity, 10% Preference Shares, and 30% Debt. All of the shareholders of Cloudstreet are Australian residents for tax purposes. To fund a major expansion Cloudstreet Ltd needs to raise a $120 million in capital from debt and equity markets.

Cloudstreet Ltds broker advises that they can sell new corporate bonds to investors for $1030 with a coupon of 6% and a face value of $1,000. Issue costs on this new debt is expected to be 1.5% of face value. The bonds will mature in six (6) years. The firm can also issue new $100 preference shares which will pay a dividend of $8 and have issue costs of 5%. The company also plans to issue new Ordinary Shares at an issue cost of 3%. The ordinary shares of Cloudstreet are currently trading at $7.50 per share and will pay a dividend of $0.40 this year. Ordinary dividends in Cloudstreet are predicted to grow at a constant rate of 4% pa.

a. (i) Calculate how much debt Cloudstreet will need to issue to maintain their target capital structure.

(ii). What will be the appropriate cost of debt for Cloudstreet?

b. (i) Calculate how much Preference Share equity Cloudstreet will need to issue to maintain their target capital structure.

(ii). What will be the appropriate cost of Preference shares for Cloudstreet?

c. (i) Calculate how much Ordinary Share equity Cloudstreet will need to issue to maintain their target capital structure.

(ii). What will be the appropriate cost of Ordinary Equity shares for Cloudstreet?

d. Calculate the Weighted Average Cost of Capital for Cloudstreet following the new capital raising.

e. Cloudstreet Ltd has a current EBIT of $1.5 million per annum. The CFO approaches the Board and advises them that they have devised a strategy which will lower the companys cost of capital by a full 1%. How will this change the value of the company? Support your answer using theory and calculations.

Given this is an Australian firm with Australian shareholders the corporate tax for a publicly listed company is 30% and the analysis should be based on before tax rates.