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CostCo Ltd (CC) is a publicly traded company with a current share price of $35 per share and had 15 million shares outstanding. CC
CostCo Ltd (CC) is a publicly traded company with a current share price of $35 per share and had 15 million shares outstanding. CC had just paid $2.50 per share in dividends and the dividends are expected to grow by 5% per year in the future. CC's long-term debt consists of 14% bonds issued with a face value of $60 million, paying semi-annual coupons. These bonds have exactly 6 years to maturity with 12 coupons to be paid. The market yield on the bonds is quoted at 11% p.a. Its equity consists entirely of ordinary shares. The beta of CC is 1.90, the risk-free rate is 3%, and the market risk premium is 7%. The corporate tax rate is 30%. A. Calculate the market value of equity and market value of debt for CostCo Ltd? B. Calculate CostCo's cost of equity and after-tax cost of debt? (5 marks) (5 marks) (3 marks) C. What is CostCo's weighted average cost of capital (WACC)? D. CostCo is planning to extend their existing business overseas. The project costs $10mil now. CostCo expects that starting from year 1, the annual Free Cash Flows (FCF) will grow at a constant rate of 3% forever. What is the minimum first year Free Cash Flows so that CostCo will accept this project? E. Discuss the strengths and weaknesses of the FCF model. Screenshot (4 marks) (4 marks)
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